Piketty on Capital: A Footnote

by Henry on April 5, 2014

I’m sure that there’s going to be plenty more discussion here on Thomas Piketty’s Capital in the Twenty-First Century (there’s lots of good arguments to be had, but it is every bit the major work that people say it is), but in the meantime, a correction. Dean Baker, in a somewhat grumpy review, says:

Rather than continuing in this vein, I will just take one item that provides an extraordinary example of the book’s lack of attentiveness to institutional detail. In questioning his contribution to advancing technology, Piketty asks: “Did Bill [Gates] invent the computer or just the mouse?” Of course the mouse was first popularized by Apple, Microsoft’s rival. It’s a trivial issue, but it displays the lack of interest in the specifics of the institutional structure that is crucial for constructing a more egalitarian path going forward.

I’ve been seeing the Gates quote circulate a bit among left-leaning friends, very likely because of its structural similarity to a notorious claim by a rather different big sweeping economics book that precipitated a lot of derision (nb though that Gabriel Rossman, despite repeated calumny from He Who Must Not Be Named, decided in retrospect that the mistake wasn’t that big of a deal). Whichever which way, Dean’s use of the Piketty quote is unfortunately rather misleading. What Piketty actually says (p.512 of the proofs version of the book, which I assume maps on to the final text):

“As for Bill Gates and Ronald Reagan, each with his own cult of personality (Did Bill invent the computer or just the mouse? Did Ronnie destroy the USSR single-handedly, or with the help of the pope?), it may be useful to recall that the US economy was much more innovative in 1950-1970 than in 1990-2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter, and since the United States was in both periods at the world technology frontier, this difference must be related to the pace of innovation.”

In other words, Piketty isn’t claiming that Bill Gates invented the computer, or the mouse, any more that he’s claiming that Saint Ronald went in there like Rambo with his missile launcher (with or without the help of trusty sidekick JP-II) to bring the Soviet Union to its knees. He’s engaging in sarcastic hyperbole to illustrate the ludicrous way in which popular wisdom attributes vast historical changes to the intervention of singular, godlike culture heroes. This is quite unambiguous in context, especially as Piketty has talked some pages before about Gates’ actual role (in a brief discussion of operating systems). Taken out of context, as it is in Baker’s review, it wrongly suggests that Piketty is ignorant or sloppy to a quite extraordinary degree.

Now, to be clear, I don’t think that this is deliberate dishonesty on Baker’s part. I can see how this kind of mistake can happen (I rely on notes myself when writing reviews; there but for the grace of God …). I also think that the broader point that Piketty’s book has little to say about institutions is a fair one. But Baker’s misattribution to Piketty of a bewilderingly stupid-sounding claim that Piketty obviously does not make is the kind of thing that could go viral (and already is going semi-hemi-quasi viral). Thus, I think, it’s worth pointing out that it’s just not so.

Update: Dean Baker has modified his review to say that the Gates bit was a “throwaway line,” which helps imo clarify his real disagreement.

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Yeah, it is a very good book with insights and analysis on every page beyond the headline number crunching. And the left-center social democratic economists like Baker and Jamie Galbraith are being grumpy about it, while the centrists, as Galbraith says, maybe like it a little too much. My impression is that the Piketty is even more Marxian than he openly acknowledges.

It seems to me that his conclusion is that global or regional wealth taxes at an effective level are improbable;that the transfer states have about reached their limit; that the creation of public capitals and commons is way out of fashion; that the “patrimonial middle class” gives too much support to the rentiers; and that worker organization is likely impotent and irrelevant. What gave us the Great Compression was the massive destruction of capital from 1914-45 and the political equality resulting from it. Marx.

1) Between Piketty and Graeber and Acemoglu we have a set of very interesting books all of which are easily “picked on” because their details of life/institutions/technology/history seems to have errors. I think there’s a couple of things going on:
(a) it’s harder than it looks to keep all the details straight when you write these things.
(b) Authors from all sorts of academic fields seem to be really bad at recent history.
– That’s probably because the scholarship of recent history is pretty fragmented and underresourced. This is more and more important because it seems we’ve seen a lot of economic/political/social/technological changes in the span that equates to “recent history”. (Probably because we’re still kind of close to the fall of the Berlin Wall and the rise of the Internet…)

2) Baker’s suggestions of other remedies to the “Piketty trap” we are in/approaching don’t seem any more politically feasible than Piketty’s. It may seem easier to target monopolies than raise overall capital tax rates, but the money dynamics in the political fight are not much better. (Likewise Jamie Galbraith’s mention of unions and labour share of profits.)

All the same I can appreciate the critique which says Piketty’s abstraction (r-g) is dangerous
because it can deter us from taking up the fight – making the inequality seem naturalistic.
(I may come back to that in another comment.)

3) I think that while you can get interesting things out of refining the definition of capital more than Piketty does, his overview message seems to be important, urgent and largely correct…

Thinking about Piketty and “a public sense of agency” and “the naturalistic fallacy.”

The great sleight of hand of right of centre economic thinking has been to portray markets as “natural” and thus to oppose any and all interventions as “unnatural.” It’s given them a psychological high ground that has helped bring us to the mess we’re in.
(Even worse, a secondary portrayal, that of economies as self-regulating, self-stabilising systems has bitten even harder on all the necessary regulation and interventions that could make life better.)

This then is the danger of (r-g). Piketty tells us that “r” has been around 4.5% and only lower for that “Golden Age” blip. The implication is that it is “returning to the natural level” and that will be taken by many on the right as an automatic reason to oppose efforts to lower “r.”

Likewise “g” is the long-run rate of growth, which you can get quotes from lots of people (e.g. Tyler Cowen, Chris Dillow and many more) as being stuck for advanced economies around the 1-3% region (Piketty puts it as 1.5% or 2.5% with pop. growth.) So here we have another “iron law” which economists happily live by – and suggests we have no agency in this matter. I’d love to see a CT seminar on long-run growth/technological advances, BTW…

In passing, Galbraith point that we can affect the rate of interest by creating new public banking institutions is a great insight and should temper my quick fire grumpiness about him and Baker in my previous comment.

Very interesting discussion. This is political economy. Inequality begats inequality in a feedback mechanism wherein Republican Supreme Court Judges help Bush win an election and Bush cuts taxes and puts Roberts and Alito on the court. And the court further weakens campaign finance reforms.

Like @7, I am uncomfortable with the “Iron Laws” like r g which make the political macroeconomy appear telelogical and drain the subject of human agency.

At the college where I work, a book club of mostly economists but a 3-5 from other social sciences just began has just begun weekly meetings on the book this week. It looks to be interesting, though several who did not complete this week’s assignment (intro, chs 1 & 2) and read only the intro complained that Piketty did not back up any of his assertions. (Isn’t that what introductions are often for?)

What gave us the Great Compression was the massive destruction of capital from 1914-45 and the political equality resulting from it. Marx.

This, perhaps unintentionally, gives the misleading impression that the Great Compression was due almost only to the decrease of physical capital in the two WWs. What capital in the US (at least the continental US) was destroyed during this period?

An important cause, at least in the US, was the real drop in the value of financial assets during the Great Depression. Piketty is not using “capital” the way economists typically do (e.g., one-good representative agent models), where capital is the just same kind of thing as “output” , measured in the same physical units as output, but applied to production rather than consumed. Rather, he uses the word for any asset (store of wealth) that is (or could be) traded on a market, and can therefore be priced. His capital-income ratio is not the same thing that economists mean by a capital-output ratio (which attempts to measure these things in physical units — see the UK end of the Cambridge-Cambridge controversy for more on this). Income is (roughly, but see chapter 1) GDP, measured in real dollars. Capital is also measured in real dollars based on its market or imputed price.

Consequently, during the 35-40 years after WW2, when stock prices were relatively low (by current standards), the capital-income ratio was much lower than today. The shift to the current level depended on not only the post war reconstruction of Europe but also on the stock-market boom that began when Volker loosened the reins a couple of years after Reagan became president.

My own pet theory is that the restructuring of tax rates under Reagan (but which began under Kennedy), the ones that drastically cut top marginal rates, fed this stock market boom because it created much bigger pools of money that the affluent had to invest somewhere, and it made it more worthwhile for the wealthy to fight for more dollars (rent-seeking, in this case) since they could keep so much larger a fraction of them.

This would suggest that rather than focusing on r-g, Piketty should focus on r(t)-g, where t indicates the structure of tax rates. Maybe he does later in the book. We will find out.

@10
Exactly. Unless Piketty is a complete idiot, his comment is an obvious bit of joking hyerbole even out of context, since Bill Gates didn’t invent the computer or the mouse. And neither did Apple. As you point out, Baker has to use “popularized” — a word Piketty didn’t write — to even get Apple into his silly and rather disingenuous objection.

I can’t believe that Baker, whom I usually respect, would be this wrong about what he admits is a trivial issue. Whether Baker’s other criticisms are substantive I don’t know, I haven’t read Piketty’s book. But I think it would be great if writers everywhere would be a little less eager to play gotcha.

I haven’t read the book yet, but based on reviews and on his other work, I am skeptical that the r-g formula will do the work he wants it to. It is a very important parameter for the evolution of debt-income ratios, but generalizing it to “capital” in general has some serious complications.

In 1982, Microsoft made the decision to make the MS-DOS program Microsoft Word mouse-compatible and developed the first PC-compatible mouse. Microsoft’s mouse shipped in 1983, thus beginning Microsoft Hardware. However, the mouse remained relatively obscure until the 1984 appearance of the Macintosh 128K, which included an updated version of the original Lisa Mouse. In 1984 PC columnist John C. Dvorak stated the mouse as a reason the Macintosh would fail.

The whole mouse/Gates thing is before my time, but taking Baker’s conclusion:
“the point is that capitalism is far more dynamic and flexible than the way Piketty presents it in this book. Given that we will likely be stuck with it long into the future, that is good news.”

i agree with the sentiment here, and it especially makes sense given where Baker ‘sits’ (DC policy thinktank). this ‘capitalism isn’t going anywhere so we had best saddle up and make it bearable’ seems to strike the Gramscian balance btw intellect and will better than Piketty’s own politics.

but, i don’t like the use of the naked word ‘capitalism’ in the above – there is already some blurring of the lines in this regard with Piketty’s book, wrt to his use of ‘capital’ & some of his history, as mentioned above.

That’s pretty accurate, but of course the mouse was invented by Doug Englebart in the ’60s. The distance between “invented” and “popularized” is one of over 15 years.

Nitpicking over these details seems really petty. It’s a search for gotchas in the hope that a single error activates “falsus in uno, falsus in omnibus.”

Picketty’s thing is clearly a joke, as none of the assertions in it are true; it’s a joke about “cults of personality,” though it would have been funnier if he had linked it to Jobs instead of Gates, largely because a fair number of people in the Jobs Cult would have nodded their heads in agreement, just as some will about the Reagan/Pope ones. Graeber’s related errors about technology seem to actually be errors, but the thrust of his point is still correct even if he didn’t get the details right.

@ mattski @ 16- wouldn’t that depend on which type of hammer you have? Granted a ball peen can drive a nail it’s just not as efficient about it as a claw hammer and forbid you should bend the nail( likely with a ballpeen) in the process. I’m generally leery of things that have only one use or one interpretation. I figure I’m going to read Piketty in tandem with Braudel’s more comprehensive history of the rise of capitalism in Europe.

Douglas C. Engelbart is usually credited with the “invention” of the mouse, due to his participation in the famous, “Mother of All Demos” in 1968. The idea of the mouse was part of a conceptual apparatus for real-time human interaction with computers that included ideas like networking, hyper-text, graphical interfaces, etc. The work at integrating all that in a “personal computer” would be extended, again famously, by Xerox PARC. The fact is that the conceptual development of the personal computer cum network took a long time, and had to be invented over and over and over again, at Stanford, Xerox, MIT, Wang (does anyone remember Wang?), IBM, Apple, Microsoft, etc.

@19 beat me too it. But the mouse was a part of the graphical user interface system, which was the real invention. And the real “institutional” point is that it was a “product” invented by large-scale corporate R & D investment, not by some small-fry venture capital techie start-up. Which might be indicative of changing patterns and functions of investment.

… Gates found himself surrounded by ten Apple employees who were eager to watch their boss assail him. Jobs didn’t disappoint his troops. “You’re ripping us off!” he shouted. “I trusted you, and now you’re stealing from us!” Gates just sat there coolly, looking Steve in the eye, before hurling back, in his squeaky voice, what became a classic zinger. “Well, Steve, I think there’s more than one way of looking at it. I think it’s more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it.”

Not sure if you took my meaning. I was pointing to the tendency of some folks to treat Marx as a panacea or a demigod or a repository of shit-that-doesn’t-stink. As opposed to a bright, acerbic fellow with a critical, but not necessarily constructive eye.

@19 JW Mason. That’s not right either. Stanford Research Institute engineer Doug Englebart (mentioned above) gave “The Mother of All Demos” in San Francisco in December 1968 (!!!), which showed very early implementations of the mouse, a windowed user interface, networking — a really shocking number of things. Engelbart had conceived the mouse, but his colleague Bill English built it from his sketches *out of wood.* This is the mouse that the patent office recognizes as first, but it wasn’t really. There were trackballs (upside down mice, basically) in use in various military systems in the 1950s and 60s in Canada, the UK and Continental Europe.

PARC implemented much of the same stuff in the 1970s, refining the edges, but they were more a of a pure R&D shop uninterested in consumerization; Apple appropriated and refined many of the same ideas for the Apple II. Microsoft, remember, developed Word for the Macintosh several years before they had a GUI operating system of their own. But Word running under DOS (which had a command line interface) could be optionally controlled with a mouse, which is seriously weird in retrospect. So Microsoft actually had a mouse and software that used it in 1983, years before they had a GUI operating system, even if the DOS version of Word was far less elegant than Word for Macintosh. Apple wouldn’t ship a mouse until 1984, but they took the idea much more seriously and thus theirs was far more coherently integrated with the operation of the computer. It was an obscure peripheral accessory for Microsoft, while the keyboard Apple actually shipped with the first Macintosh had no arrow keys, to *make* users use the mouse for everything. (The arrow keys returned in the second version.)

Basically, Dean Baker doesn’t know what he’s talking about. He’s misunderstood both Piketty’s joke and the relevant history. I like the guy, but he’s made an ass of himself here.

I look at the quote at the center of the OP, and I can see Dean Baker’s point, as well as Piketty’s and Henry Farrell’s. The conceptual language is, itself, untrustworthy. I would call Piketty to account for saying, “the US economy was much more innovative in 1950-1970 than in 1990-2010”, as if “innovative” was a measured observable, with a clearly defined relationship to various dimensions of economic performance.

We don’t have a good framework of terms, here, which would let us understand each other, and sarcasm, though entertaining, just compounds the base problem.

Metatone: The details matter a lot. In particularly, it’s impossible to have a negative labor share without coercion: people will just refuse to work. So if you start from noting that income is divided between capital and labor, and thus that growth in global income (g) and growth in capital (r) cannot go far apart from each other, that’s pretty clear.

But the (best) data you have isn’t on growth of capital income: it’s on returns to capital. And one way to have a return on capital is to reduce the capital intensity of a given industry. This doesn’t change the growth of capital income, but it does increase return. NuCore would be more lucrative than US Steel even if all the labor costs were the same, because less money is tied up to make a ton of steel at one then the other. So not all returns to capital have the same distributional effect.

Destruction of capital increases, rather than decreases returns to the owners of the surviving capital. How much is the only wrench in town worth if you really need it?

Furthermore, the distribution of income can be changed legislatively via taxation. There are consequences, some of which are quite bad, for taxing capital formation specifically. But this is not to say that one can’t redistribute.

Economics has become the Lillian Hellman of the social sciences: every word is a lie, including including ‘and’ and ‘the’. Of course, it is hard to write a book on economics without making big mistakes, when the conventional framework of terms is total crap, one Big Lie after another. Communication depends on social conventions, and the conceptual language and conventions of economics are deeply corrupt.

Work like Piketty’s, or that of Graeber or Acemoglu, is stimulating, in part, because it hints at a vision, a truthful vision, of how the economic system works and is working. We need such a vision, to coordinate a reform politics that gets somewhere, anywhere, in adapting to our evolving, deteriorating circumstances. We don’t have such a shared vision, or the language it could provide to discuss things. What we have, instead, is the ideological framework erected by the fake discourse of neoliberals and conservative libertarians, and derived from the caricature that is Friedmanite “Free to Choose” market economics and the pejoratives of Public Choice hostility to “rent-seeking” corruption of big government. So, whereever Piketty, or Graeber or Acemoglu, or Galbraith or Dean Baker, or any number of others, run out of whatever road they are paving themselves, we are back in the deeply rutted swamp of Econ 101 textbooks written by the likes of Mankiw or, even worse, baseless pontifications legitimated by advanced “research” with DSGE models and the like.

I thought Galbraith’s review did a remarkable job: the first few paragraphs are a lucid and elegant brief review of the conceptual problems of defining “capital” and the role of “capital” in the “capitalist” economy. Conventional, mainstream economics is a mess of lies, because it sharply limits the application of such critical thinking. The Solow growth model is stupid, but it is official, accepted establishment stupid; so we cannot have intelligent discussion, sorry.

Mainstream economics does every thing it can possibly do to shed referents, without losing its last shred of facial plausibility. Should we be surprised that it is so difficult to narrate the history of the last century or two, with a framework of terms, which, by design, has almost no correspondence to events? Is there a credible, textbook narrative analysis, of, say, the Great Depression, the most dramatic and important macroeconomic event in a century? None that I know of that goes beyond one or two events without absurd oversimplification or the introduction of wildly discordant explanatory schemes.

To narrate the political determinants of the distribution of income and wealth, if done well, is going to be a deeply subversive and probably revolutionary act. If Piketty did it well, either he wouldn’t be published, or if published, he’d be studiously ignored, when he wasn’t being radically mis-interpreted.

Given how much pressure the economic system is under, though, I suspect some obvious intuitions are likely to be promoted into the popular discourse by Piketty and his critics, almost despite their fumbling. I would think the notion that r > g cannot happen, without the margin, r – g, being predatory, might slip thru, if only because it is also pervasive, everyday experience.

To be clear, I wasn’t trying to castigate Piketty (or Graeber or Acemoglu) for the problems with various details – indeed my hamfisted point was that so much of what has happened since the 70s hasn’t been studied very well (either because of lack of resources, or ideological interference) we’re really struggling to write books that explain our current economic position.

@BruceW – I hope you’re right about r-g = predatory slipping through.

I’d add that I think that focusing on r & g can be valuable, the trick is not to let the right use the naturalistic fallacy to prevent anything being done about them.

My own personal frustration is that the acceptance of the limitations of “g” seems entirely too bound up with the definitions at work in economics. Somehow we seem locked into a loop where all at once “we’re richer than ever before” – but – “we have to cut back on all these programs…” – and if you do that to research, then it probably will change the progress on the technological frontier, no?

To someone familiar with the history of computers (not too many people, I guess) this is obviously a joke. Bruce Wilder @22 and nvalvo @28 give a good account of the invention of the mouse; the invention of the computer is a bit trickier. We can go back to the ENIAC as the first electronic general-purpose computer, turned on in 1946, but earlier there was the Atanasoff–Berry Computer in 1941 (the first fully electronic computer, but not general-purpose and no longer running in 1946), or Konrad Zuse’s Z3 in 1941 (the first programmable computer, but elecromechanical, and not discovered to be completely general-purpose [Turing complete] until decades later), or Babbage’s Analytical Engine of the 1830s (mechanical, general-purpose, but not built to completion until the 1990s).

I think it’s something like figuring out who built the first automobile.

The Gates/mouse thing is so obviously a joke I can’t believe anybody who actually read the book would take it seriously. This bit in the book was preceded by Piketty’s stab at the justification of the stratospheric salaries of what he calls “supermanagers,” a phenomenon that’s apparently most evident in the US and Britain. Pikkety is mainly attacking the idea that these salaries reflect the marginal productivity of their earners. He offers other explanations such as the indirect participation of the executives in setting their compensation and the substantial reduction in top marginal tax rates. From there he points out that the reductions in top marginal rates are not statistically related to productivity growth. The paragraph that contains the joke begins by pointing out that “these issues are too strongly charged with emotion and too closely bound up with national identities and pride to allow for calm examination” and therefore “reason is often at a loss”.

The great sleight of hand of right of centre economic thinking has been to portray markets as “natural” and thus to oppose any and all interventions as “unnatural.”

Yes. And part of the antidote is to remind everyone that what the right is doing is simply ignoring the “collectivist” component (foundation) of the market. IOW, there isn’t any such thing as a “free market.”

Equally, and to guard against over-reach by our side, we shouldn’t deny the basic value of market discipline. We want to tinker with the market, but not wreck it, in my view.

Bruce Wilder wrote @33:
“Economics has become the Lillian Hellman of the social sciences: every word is a lie, including including ‘and’ and ‘the’. “

I would offer an amendment: not all economists lie but there seems to be a pronounced professional reticence amongst economists to call a fellow economist for an outright fabrication (especially if the lie is aimed at that swamp creature, K. Marx.).

Metatone: My own personal frustration is that the acceptance of the limitations of “g” seems entirely too bound up with the definitions at work in economics. . . .

The popular centrist political obsession with “growth” sloganeering is going to be an important filter on interpretation of Piketty’s work. The kaleidoscope of Brad “Center for Equitable Growth” DeLong self-parody began last December will continue an extended run, no doubt.

The looming capital fact — sorry — of 21st century economics would seem to me to be global resource limits and congestion effects, which will constrain both per capita and aggregate growth in ways that have only been experienced locally and exceptionally since the industrial revolution began. I think there’s a good case that raw potential “g” is near-zero or negative for much of the rest of the century. High return on capital could be some combination of predatory or catabolic (Watson Ladd @ 32), almost certainly is subject to collapse, as the political power that support economic rents erodes or the capital stock runs out.

Right now, I think the political argument that “jobs” require ditching labor protections, environmental protection, social welfare, principled international behavior, etc., is winning, because this discussion we’re having is still way too abstract and detached. Some large part of that abstract detachment is related to economic conventions, including the meteorological fallacy and the ritualistic acceptance of absurdities such as “skills-biased technological change”, but also seemingly unrelated false conventions, such as the “market failures” canon. Economics is a logic chain of Big Lies, and we need to break that chain.

I wasn’t saying that economists — even those who might be my political opponents — necessarily intend to lie, only that economics, as it exists, makes it very hard for economists to articulate useful truth.

In fact, I would say economics makes it very hard for economists to discuss economic topics intelligently among themselves. Which accounts for the degeneracy of much of the research program, as well as degeneracy of the intellectual contributions of economists to the popular political discourse.

Trying to look at political economy in the same vein as Peter K (#8), the decline of guaranteed pensions means that we are all told “invest in the stock market for your retirement, and, by the way, you won’t be able to save enough unless you take a fair degree of risk”, which leads to millions of Americans (I don’t know enough about European retirement systems to know whether to include them) becoming cheerleaders for the stock market, and so automatically opposed to any policies that might reduce inequality by reducing the profitability of stock markets. And, of course, this change has greatly increased the extent to which the financial services industry acts as fantastically profitable rentiers.

I do expect economists to do the job as defined by Marx and Keynes: to prevent catastrophe and horror, to prevent (not patch up afterwards) recessions and depressions and stagnation and wars of competition and gross inequalities and inefficiencies. I do not give them points for waving their hands and saying they tried and the a-holes wouldn’t listen. The job description does not allow failure, the stakes are too high.

It’s more politics than academics, more art than science. I don’t worry if “The only thing to fear is fear itself.” is completely clear and accurate. I don’t care if they lie.

“Piketty is not using “capital” the way economists typically do (e.g., one-good representative agent models), where capital is the just same kind of thing as “output” , measured in the same physical units as output, but applied to production rather than consumed. Rather, he uses the word for any asset (store of wealth) that is (or could be) traded on a market, and can therefore be priced. His capital-income ratio is not the same thing that economists mean by a capital-output ratio (which attempts to measure these things in physical units — see the UK end of the Cambridge-Cambridge controversy for more on this). Income is (roughly, but see chapter 1) GDP, measured in real dollars. Capital is also measured in real dollars based on its market or imputed price.”

I’m not an economist, but I think that the whole point of the Cambridge controversy was exactly that mainstream economists assume implicitly that they can treat capital “price” (what Picketty does) and treat it as it was phisical units. So I’m not sure that P. is doing something different from most economists.

Which leads me to:
Marx actually had a theory about “real” (manifacturing) capital and rent capital (that he didn’t consider “true” capital).
He believed that all businesses tend to bounce around an average rate of profit, because when the rate of profit in a certain field falls under the average, capitalist will disinvest from there, while where the rate of profit is higer than the average, more investiment will come. But while “real” capital (factories) react to changes in the rate of profit with changes in the quantity of factories, rent capital (like land) is fixed in quantity, so only react in price: so the price of some rent capital is equal to=
[cashflow genrated by the rent capital]/average rate of profit].
So the price of the rent capital is determined by the average rate of profit, which in turn is determined by the rate of profit of the “real” (manufacturing) capital.

If the rate of profit of “real” capital falls, because for example newly added capital is useless because we reached a technological limit[1], the price or “rent” capital will shoot up.
This is a good explanation, IMHO, for the bubbleness of capital markets in the recent decades.

You say:
“…that the restructuring of tax rates under Reagan (but which began under Kennedy), the ones that drastically cut top marginal rates, fed this stock market boom because it created much bigger pools of money that the affluent had to invest somewhere…”

Ok, but this implies that those pools of money couldn’t find productive investiment and so fueled a bubble. So in pratice you are implying that the marginal rate of profit for new “real” capital was/is very low, but then blame taxes. I think Marx’s explanation is better.

@Watson Ladd 32 and Bruce Wilder later
“In particularly, it’s impossible to have a negative labor share without coercion”

Certainly a negative labour share (people working for free and actually paying their employer) is impossible – but I think that you mean a falling labor share? That is certainly possible (it happened everywhere including China in the last decades).
Maybe you mean that you can’t have falling ral wages? (but this sorta happens in recessions).

“And one way to have a return on capital is to reduce the capital intensity of a given industry. This doesn’t change the growth of capital income, but it does increase return. NuCore would be more lucrative than US Steel even if all the labor costs were the same, because less money is tied up to make a ton of steel at one then the other. So not all returns to capital have the same distributional effect.
Destruction of capital increases, rather than decreases returns to the owners of the surviving capital. How much is the only wrench in town worth if you really need it?”

You are mixing up three different things when you speak of reduction of capital intensity:
1) Material reduction of capital (like when a coutry is bombed, say Germany in WW2) doesn’t reduce capital intensity because it reduces both capital and output. It could increase the rate of profit of remaining capital becaue of a lack of competition, but this is not the same thing.
2) Technological advancements in the production of capital goods can reduce the capital ratio as capital goods become cheaper.
3) At fixed technology, the cost of production of “real” capital is also fixed. So the “capital intensity” at a given technology level is also quite fixed (assuming fixed otput prices and wages).

____________________________________________________
[1] In pratical terms, the marginal rate of profit of new “real” capital and the average rate of profit of “total” (real+rent) capital is the same. For example, suppose that one capitalist, Apple, creates a new product, the Iphone, that sales a lot. The “real” capital involved is the factory that produces the thing, plus the R&D office. But then another competitor, Samsung, tries to sell a similar product and steal market shares from Apple. One of these two things will happen (or a mix of the two):
a) Samsung steals succesfully some market shares from Apple, forcing Apple to cut prices. As more competitors enter the market, the rate of profit in this sector falls, until it reaches the average rate of profit. But in this situation of perfect competition, everyone’s rate of profit is equal to the marginal rate of profit.
b) Samsung cannot steal market shares from Apple, because Apple is just too famous (or has some other “ineffable” advantage). This means that the rate of profit of Samsung will be much lower than Apple’s rate of profit, if we think in terms of real capital. But this “ineffable” thing that Apple has has a value on the market, because in pratice it is a form of “rent” capital. Using Marx’s calculation for the value of “rent” capital, by definition we get that Apple’s rate of profit for total (rent+real) capital is the same than the average rate of profit, which is the same for the last competitor who enters the market succesfully.

Only if by “economics” you are referring to the protocols of a self-perpetuating professional hierarchy and not to a body of literature. There are gems and slag in the literature, only the hierarchy insists on elevating the slag and burying the gems.

You could think of it not as a description of the real economy but as a two-good model, with fixed-in-quantity and easy-to-make-more standing at the endpoints of what’s really a continuum of difficulty-to-increase-supply. With the intent that the model reveals how “capital” flows between the two categories [~~over the distribution] under changing economic conditions.

That’s probably not the words that Marx would have used to catalogue or describe what he was writing about, but he was writing a long time ago. Rhetorical styles are culturally [and thus temporally] dependent, and jargon changes too.

Yes. I said, “lies”, but it could be accounted for as appallingly bad taste.

bob mcmanus @ 45

OK. I confess that I’m a fan of economics, and would like to see much better quality of play in the professional leagues. Also, I’d like to understand what’s going on, even when I don’t like it, or especially when I don’t like it.

On the mouse thing, Englebart and his team invented that stuff while they were at SRI, which was at the time directly affiliated with Stanford. Primary funding came from DARPA, which is the say federal R&D money run through the military. So it was academia with funding by the government, not large-scale corporate R&D as Halasz states. Some of Englebart’s people later went to Xerox and further developed the technology there.

RSA: It was Babbage’s Difference Engine that was built, and there are two working examples, I believe. The Difference Engine is a calculator, not a computer. No one has yet built an Analytical Engine, although there is some interest in the project.

Another candidate for the first computer is the Colossus, built at Bletchley Park. However it’s probably better to say there were several projects going on at about the same time.

a two-good model, with fixed-in-quantity and easy-to-make-more standing at the endpoints of what’s really a continuum of difficulty-to-increase-supply.

This doesn’t sound right. What does this have to do with the distinction between “rent capital” and “real capital?” Houses are bought and sold. Houses are also rented. Land is about the only good I know of which is fixed in supply. But land is bought and sold as well as rented. Kitchen equipment–fairly easy to produce more of–is bought and sold as well as rented. Clothing, lawn mowers, etc.

What insight is gained by distinguishing between markets for sale and markets for rent? I’m not saying there isn’t a distinction. I want to know why you, or Random Lurker, thinks that it’s significant.

It has been been argued, by von Neumann among others, that Alan Turing invented the computer in the 1936 paper that described the Turing machine. Babbage has been mentioned, and Leibniz had some ideas along these lines.

Microsoft’s first hardware product was the Z-80 SoftCard which plugged into a slot on the Apple motherboard to allow the use of CP/M software (most of which soon migrated to the IBM PC).

@mattsky
What Collin said above, however I’ll try to get more into the details, in two parts: what’s the theory and why is it relevant.
WHAT’S THE THEORY
Marx distinguished four kinds of capital goods: manifacturing (factories, what I called real), land and natural resources (what I called rent capital), commercial and financial capital.
Let’s start with “real” capital.
Real capital is that part of capital that is actually manufactured, so basically factories. In the case of houses, when we see houses as capital goods, they are partly “real” (the brick and mortar) and partly “rent” (the land they occupy).
The “real” part of capital has a cost of production, that is technologically determined (for Marx, who believed in the LTV, it was determined by the amount of labor needed to build them).
Now, it is assumed that the rate of profit of each capital good will tend to reach the average rate of profit. In the case of real capital, this happens through the material production of new capital goods in those sectors where the rate of profit is higer than average, until they fill the market. In those sectors where the rate of profit is lower than the average, the cost of production of capital goods will be higer than their market value, obsolescent capital won’t be replaced, and the physical quantity of capital will slowly fall.

Rent capital, like land, however, does not have a cost of production, so cannot respond to changes in the rate of profit in its sector by changes in quantity, but only in price. The market price of land, by consequence, will adjust so that land assets will have the average rate of profit.

Commercial capital, according to Marx, is just a subpart of manifacturing capital. However, given the importance of brand, distribuition etc. in the economy of today, I think it should be treated as analogue to rent capital. The same goes for all the forms of mini-monopolies, like patents or land in the city centre, since the whole point of a monopoly is that it is not reproductible.

Finally, financial capital has an interest rate, that cannot exceed the average profit rate because most debtors are businesses that use the money to build capital goods, so the interest rate is linked to the expected rate of profit to new capital. Financial capital then acts as rent capital.

But, if financial, rent and commercial capital prices are determined by the average rate of profit, what determines this misterious rate of profit?
It has to be determined by the “real” capital goods, whose cost is independent from the average rate of profit.

WHY IT MATTERS
If we accept this theory, we see that the various bubbles, the increase in the debt levels etc. are a consequence of a falling rate of profit on new marginal real capital goods (see my note in my previous comment).
This means that it is the secular stagnation that caused the bubbles, and not the other way around.
But what caused the secular stagnation?
I believe that the problem is distributional, that workers get wages that are too low in the manifacturing sector, but I have not a good explanation of this.
However I don’t think that, as Bruce Wilder implies, the stagnation can be caused by the rent/financial sector.

From Sandwichman @48″‘Bruce Wilder: economics makes it very hard for economists to discuss economic topics intelligently…’

“Only if by “economics” you are referring to the protocols of a self-perpetuating professional hierarchy and not to a body of literature. There are gems and slag in the literature, only the hierarchy insists on elevating the slag and burying the gems.”

In looking at what economists talk about when they talk about economics since the crash, I have to say it is the economists who are unable/unwilling to discuss the topics in an honest way. They are instead more focused on propping up their thesis (and ego) than engaging in a truthful look at the issue. They seem more intent on bellowing about freshwater flaws, etc. INFLATION IS AWFUL! Therefore no raises ever to avoid that pesky wage-price spiral! Quite tiresome.

We are in the midst of a terrible crash in a new century caused by new instruments and technologies. Time for new thinking. Sounds like Piketty may be among the first to venture into new territory.

To a non-economist, trying to make sense of the analysis offered here and elsewhere by genuine, certified economists, it’s been a hard slog. Despite their ritual denials, they all still seem haunted by Malthus, Marx and Keynes, and I’m left wondering if the techniques that have staved off the periodic crises of capitalism aren’t like some drugs; the more of them you take, the less effective they become.

Somewhere in the Sixties, or thereabouts — after the war, after Bretton Woods and the various economic miracles of Europe and Japan — the trick bag must have seemed almost bottomless. Several decades of enforced underconsumption in the industrialized countries had bequeathed capitalism a torrent of pent-up demand, and, for the first time, reasonably effective demand management was available to structure it: mass advertising and market surveys, planned obsolescence, and so forth. Labor pacification had evolved from a form of warfare into a form of engineering, with lifetime employment in Japan, Mitbestimmung in Germany, and stage-managed union contracts and the GI Bill in the U.S. Later, as markets in the industrialized world matured, outsourcing and union-busting were available to be deployed as required. Add to all that the almost effortless exploitation of resources from the developing world, the cost-plus largesse of cold-war defense contracts, government subsidies to new technologies and to the education of those who developed them, and it’s not surprising — again, to a non-economist — that the triumph of capitalism was trumpeted almost everywhere. Stalin, Mao, and their successors disagreed, of course, but they were bound to, weren’t they? Nasser and Nkrumah, Castro and Tito and Nehru also disagreed, but they were losers, i.e without the wherewithal to turn themselves into capitalists even if they’d wanted to.

Things look very different now. Anthropogenic climate change has resurrected Malthus, the wage slavery of China’s Special Economic Zones and the specter of technological unemployment and rising inequality in the West have resurrected Keynes, if not yet Marx (pace bob mcmanus.) Whatever we eventually make of all this, I agree with Bruce Wilder that the present ruminations of economists, even the most accessible of them, have not been especially reassuring. I also agree with him that financialization is the worst form of disinvestment, a frenzied grubbing after yields without much thought given to the wreckage of the real economy left behind in its wake. Jamie Dimon, in short, is no Andrew Carnegie. While it may be true that it’s a lot harder to be Andrew Carnegie these days than it was at the launch of the capitalist rocket, to me our risk-averse modern plutocrats represent not so much the apotheosis of capitalism as a failure of the imagination on the part of those who still claim to believe in it.

What I’m looking for is a sense of clarity. I don’t get that from your four types of capital. Least clear to me was your graph on commercial capital which didn’t specify anything in particular, and worse, overtly sought to mix “real” and “rent” capital together, with no explanation! That’s a pretty big red flag IMO.

Also, there was no mention of human capital. No mention of intellectual capital. Where do these fit in? Are we gaining insight into the nature of “capital” [which after all is an idea, not a thing, and we’re trying to figure out if this idea is useful]? And how do we want to use it?

As far as bubbles go, they were happening in 1637 and likely before. Which is to say that there isn’t anything characteristically modern to this phenomena. People jump at the chance for an easy return on their “capital”. No mystery there, although it seems important to notice that the easy availability of credit will magnify bubble dynamics by making them easier to inflate.

You say,

I believe that the problem is distributional, that workers get wages that are too low in the manifacturing sector, but I have not a good explanation of this.

“But the (best) data you have isn’t on growth of capital income: it’s on returns to capital.” – Watson Ladd #32
The opposite is the case. There are plenty of caveats to raw data on capital incomes, but it’s there and can be analysed. Rates of return requires assumptions about the values of capital and for reasons including (but not just) the Cambridge controversies already noted in discussion, this raises a host of problems.

Without reading, I can’t be too critical, but is he too rote-analytical? The view from down here seems to make it quite clear that these trends are, at bottom, political.

The book is very political. It is economic history more than economics.

And importantly Piketty from France has a global perspective on history and prospects. He is not one to give much credit to FDR and the CIO, since similar things happened in X other countries in the same period (or when a chance arose after the War). He does recount the contingencies and particularities in each country, but the fact that most of the industrialized countries enacted a progressive tax system in the same generation is the kind of trend, the global forces, he is studying.

Certainly some political idealists might call Piketty a little too materialist and determinist.

On Piketty’s solution – although I havent got there yet, my impression is that (ideally) he would like an international wealth tax. (which he acknowledges isn’t likely, but the implication is that the solution exists in that area)
What are people’s perspectives on this ? Particularly when compared to Baker’s solutions? (reformed corporate governance seems weak tea ? how would the specifics work of rising wages in China enhancing the bargaining power of large sections of the workforce (this seems very cryptic but I’m sure Baker has fleshed it out somewhere)? Reforming patents seems interesting, how realistic (politically) is it that this will be done at a level that would make a serious dent in inequality ? H0w would the mechanisms of that work?) Again, I’m sure Baker has written extensively on this and Ive just been too lazy to follow, so I’m not picking holes just curious.
Also, the general left solution (domestically oriented Unions) How much of a sloution is this in a globalised economy ?

= = = William Timberman @ 2:48: Somewhere in the Sixties, or thereabouts — after the war, after Bretton Woods and the various economic miracles of Europe and Japan — the trick bag must have seemed almost bottomless. Several decades of enforced underconsumption in the industrialized countries had bequeathed capitalism a torrent of pent-up demand, and, for the first time, reasonably effective demand management was available to structure it: mass advertising and market surveys, planned obsolescence, and so forth. Labor pacification had evolved from a form of warfare into a form of engineering, with lifetime employment in Japan, Mitbestimmung in Germany, and stage-managed union contracts and the GI Bill in the U.S. = = =

Between 1920 and 1960 the world was undergoing conversion to petroleum/gasoline/diesel fuel. Animal and human power gave way to internal combustion + electricity. Thousands of quads of energy were mined from the Carboniferous Era and dumped into the current homo sapien economy. For the most part, this simply gets ignored in modern economics and economic theory, and attempts to discuss it are derided. We’ll see [1] whether that was just a coincidence or a critical link.

In return my goto Marxist economist Michael Roberts March 31 mentions Piketty while discussing Marxist crisis theory and declining rate of profit. Let’s see, people who Roberts says in this article have Marx (and economics) all wrong: Strain, DeLong, Stiglitz, Henwood, Cowan, Yves Smith, Pilkington, Joan Robinson. He could be right, for all I understand this stuff.

Capital is power, Capital is language (C Marazzi), Speech is power (Foucault?); power is everywhere; all is capital and all is labour. So why are the rich getting richer? What is the universal speech act, the episteme that legitimates inequality?

Haven’t read the book yet — it is next on my list. Just want to say that, with Piketty, and also Quiggin’s Zombie Economics, Brynjolfsson & McAfee, Graeber, and perhaps a few others, it feels like economics is getting back on track toward becoming a real social science (despite any errors these books may exhibit, which I would always expect to exist, anyway).

(I just watched the YouTube of Brynjolfsson & McAfee presenting their thesis at one of the Google talks, and they are very good. Recommended viewing.)

I think that “capital” is a concept that will always remain slightly outside mathematization and quantification, because it is a higher context. Indeed it is formally analogous to “language”, “context”, “ritual”, “symbol”, and “institution”.

But I think we could verbally define “capital” as: that, which serves to make transactions (and/or work-transformations) to be easier or more gainful, so that individual choices are made as to whether to acquire it and use it in those transactions or work processes.

Thus the two important parts of the definition are: it makes doing other things easier, and it is, under certain conditions, possible to individually acquire. That is, it is tradable or negotiable. “Capital” is thus an immediate subset of the set of ALL economic institutions — which reduce costs if they are working properly, but which are not always so tradable (e.g., governmental economic institutions).

There are four main kinds of capital, so far as I can see: 1. Human: individual learning, and at the group level, socio-political power (which can be acquired); 2. Geographic: spatial centricity and land; 3. Manufactory: technology and manufacture; and 4. Financial Liquidity: consumer durables and wealth assets including financial paper. Their relative importance has varied throughout history.

Capital cannot have absolute valuation — much like money cannot, over the long term. (This is conceptually adjusted-for, although not terribly well, in at least two ways: A. the hard-money goldbugs, who think that money must have a hard value for The System to work properly (and which, I think, is the source of the intellectual error of the Very Serious People in this economics crisis, when they are not committing outright malfeasance) — and/or, B. the discount rate, a conceptual back-formation from the financial markets, and which gives the appearance of conversational omniscience to financiers and capitalists, — and thereby fools a good many people, including it seems most economists, into thinking that financiers must know what they are talking about.)

Capital’s value is really local, and sometimes very short-term. As Adam Smith might have written, it is “limited by the extent of the market”. (He wrote that about the “division of labor”, but it also applies by group extension to the value of capital.)

The way that capital is “quantified” (in quotes, because the quantification is loose and provisional,) depends upon the two main decision-making processes: prices and votes (in the case of socio-political capital).

And, in turn, current prices and votes all come down to, or are determined by, the individual’s finite daily attention-budget, composed of current needs plus current attention to future needs — in tandem with all other individuals.

However, it all does not necessarily all add up. The finite daily attention-budget of individuals is a permanent failure of information, a permanent market failure, frustrating Hayek’s dream of the market as always the best calculating device. Especially when new complications arise.

If prices aren’t working to satisfy the whole society (a complication that is currently building up, in the case of increasing inequality) then we are going to turn more to votes, to solve our problems. This is also really a part of “economics”, however much its tenured practitioners may resist this conclusion.

my impression is that (ideally) he would like an international wealth tax.

Yes, but he also thinks that moving towards a global or regional wealth tax will increase transparency and data sets. I forget exactly, but he thinks probably 20-40% of private wealth is hidden in closed societies (Gulf States) or especially in tax havens and private foundations.

His prime example is Liliane Bettencourt, L’Oreal heiress, who paid something like 5 million euros in taxes on unknown income from $30+ billion in wealth. Of course she didn’t spend the whatever let’s say 1 1/2 annual billion minimum in returns. She re-invested it so it wasn’t “income.”. Which is the Piketty and our problem.

Wm. Timberman @62:
Yes, I think this begins to answer what seemed Random Lurker’s question-with-too-obvious-an-answer @59, namely, why do “workers get wages that are too low in the manufacturing sector”? Obvious in the sense of end-of-Fordism, end-of-capitalism’s-golden-age, drastic decline of unions, relocation of some production to global South. Question is whether this trend will reverse itself eventually, as labor costs in the developing world become perhaps (emphasis on “perhaps”) impossible to keep driving lower, and, if it does reverse, whether the result will be hopeful (e.g., resurrection of some kind of quasi-Fordist model) or not hopeful (e.g., declining profit margins coupled w inability to find a new workable model of capitalism drive firms into self-destructive frenzies of one kind or another, taking a lot people down with them). I admit I don’t really know what I’m talking about but am emboldened to comment anyway because this thread does not impress me as one where a whole lot of people know what they’re talking about (although the economists, of which I’m not one, may).

Ronan @68rising wages in China enhancing the bargaining power of large sections of the workforce (this seems very cryptic but I’m sure Baker has fleshed it out somewhere)

ISTM rising wages in China will only have a global impact on location-of-factories decisions when coupled w generally rising wages across the whole global South. Otherwise, when wages in China rise, companies X,Y,Z will fiddle w the supply chain by moving production to eg Vietnam, Bangladesh etc. Only an across-the-board rise in wages might conceivably raise labor’s bargaining power in the global economy.

Will that happen? I have no idea. I. Wallerstein has suggested that w/, among other things, continuing deruralization and eventual leveling off of pop growth, capital’s ability to keep finding lower-cost sources of labor will erode, but I don’t know if that’s right.

Capital is power, Capital is language (C Marazzi), Speech is power (Foucault?); power is everywhere; all is capital and all is labour. So why are the rich getting richer? What is the universal speech act, the episteme that legitimates inequality?

This is unhelpful. Capital is not language. Inequality is not legitimated, to the extent it is legitimated, by a “universal speech act,” but rather by a whole variety of “speech acts,” e.g., every time a David Brooks writes an op-ed column about entrepreneurialism or whatever, that is a discrete speech act, not a “universal” one, that contributes in a small way to the legitimation of inequality.

You (bob mc.) obviously read a tremendous amt, far more than I, but seem to have a weakness for facile, rather unilluminating poststructuralist aphorisms (“capital is language,” “power is everywhere”). I know Foucault (supposedly?) said “power is everywhere,” but so what? Where or what does that insight get you?

The argument over who “invented” the computer is one that thousands of words have been spilled on, and each “inventor” has his partisans.

However, the first mass market* personal computer was the Apple II, introduced in June, 1977. The second was the TRS-80, introduced in August, 1977. The third was the Commodore PET, introduced in October, 1977.

* I say “mass-market” to exclude the earlier devices aimed almost exclusively at hobbyists, such as the MITS Altair and the Apple I.

[I accidentally entered this with an old moniker so it got stuck in moderation. I will try again:]

Haven’t read the book yet — it is next on my list. Just want to say that, with Piketty, and also Quiggin’s Zombie Economics, Brynjolfsson & McAfee, Graeber, and perhaps a few others, it feels like economics is getting back on track toward becoming a real social science (despite any errors these books may exhibit, which I would always expect to exist, anyway).

(I just watched the YouTube of Brynjolfsson & McAfee presenting their thesis at one of the Google talks, and they are very good. Recommended viewing.)

I think that “capital” is a concept that will always remain slightly outside mathematization and quantification, because it is a higher context. Indeed it is formally analogous to “language”, “context”, “ritual”, “symbol”, and “institution”.

But I think we could verbally define “capital” as: that, which serves to make transactions (and/or work-transformations) to be easier or more gainful, so that individual choices are made as to whether to acquire it and use it in those transactions or work processes.

Thus the two important parts of the definition are: it makes doing other things easier, and it is, under certain conditions, possible to individually acquire. That is, it is tradable or negotiable. “Capital” is thus an immediate subset of the set of ALL economic institutions — which reduce costs if they are working properly, but which are not always so tradable (e.g., governmental economic institutions).

There are four main kinds of capital, so far as I can see: 1. Human: individual learning, and at the group level, socio-political power (which can be acquired); 2. Geographic: spatial centricity and land; 3. Manufactory: technology and manufacture; and 4. Financial Liquidity: consumer durables and wealth assets including financial paper. Their relative importance has varied throughout history.

Capital cannot have absolute valuation — much like money cannot, over the long term. (This is conceptually adjusted-for, although not terribly well, in at least two ways: A. the hard-money goldbugs, who think that money must have a hard value for The System to work properly (and which, I think, is the source of the intellectual error of the Very Serious People in this economics crisis, when they are not committing outright malfeasance) — and/or, B. the discount rate, a conceptual back-formation from the financial markets, and which gives the appearance of conversational omniscience to financiers and capitalists, — and thereby fools a good many people, including it seems most economists, into thinking that financiers must know what they are talking about.)

Capital’s value is really local, and sometimes very short-term. As Adam Smith might have written, it is “limited by the extent of the market”. (He wrote that about the “division of labor”, but it also applies by group extension to the value of capital.)

The way that capital is “quantified” (in quotes, because the quantification is loose and provisional,) depends upon the two main decision-making processes: prices and votes (in the case of socio-political capital).

And, in turn, current prices and votes all come down to, or are determined by, the individual’s finite daily attention-budget, composed of current needs plus current attention to future needs — in tandem with all other individuals.

However, it all does not necessarily all add up. The finite daily attention-budget of individuals is a permanent failure of information, a permanent market failure, frustrating Hayek’s dream of the market as always the best calculating device. Especially when new complications arise.

If prices aren’t working to satisfy the whole society (a complication that is currently building up, in the case of increasing inequality) then we are going to turn more to votes, to solve our problems. This is also really a part of “economics”, however much its tenured practitioners may resist this conclusion.

Bob – good, but I’d add (without pleasure) that tax is just a palliative measure.

(1) it cedes the high ground by pissing around with what then looks like fairly-earned treasure.

(2) Capitalistic production (and the parasites’ ravenous suction) remains un-policed if we must feed the beast to get the brass which from its muck shone.*

*A reference to a Yorkshire saying (like eating all and nothing paying). Though that may be too obscure, I fear I cannot do much more. Clearness and my chosen style are rather hard to reconcile (even this new footnote scansion hampers my desired expansion.)

@mattski 64
Sorry, I’ll try to explain with more clarity the distiction between the 4 kinds of capital, starting from Marx, and then adding some tweaks:
1) MARX
As you know, Marx believed in the labor theory of value. Let’s explain the 4 types of capital in Marx’s theory using his logic that imlies the LTV, and then in the tweaks I’ll try to re-adapt the theory without the LTV (though I happen to believe that the LTV is correct, but I suspect you wouldn’t appreciate an explanation that implies the LTV).
Marx believes in the LTV, that implies that the cost of all stuff is directly proportional to the labor needed to produce it. Literally: If you want a factory that is built by 100h of work, you’ll have to pay 1000, If you want a smaller factory that is built by 150h, youll’have to pay 1500. A car that needs 10h? 1000; etc. [The LTV is actually an equilibrium theory IMHO, but lets not open this other can of worms, and assume that all prices are always “at equilibrium” and thus proportional to labor].
This is also true for capital goods. This is what I called “real” capital, is the only “true” capital in the marxist sense, and is literally composed by past labor.
But then Marx realizes that landed capital (very important in his times) cannot be described this way. He then states that land is not really capital, but is treated as such in a capitalist economy. This is what I called “rent” capital and refers specifically to “rents” in the sense of the classical economists, that means land rents (as opposed to capitalists “profits”).
So “real” capital is frozen labor and profits are produced by labor, whereas “rent” capital is the ownership of some scarce natural resource, literally, and nothing else, and thus produces “rents” in the classical sense.
Then Marx says that “commercial” capital is a subpart of industrial (“real”) capital, and while I disagree, I’ll explain this in the tweaks, so we can ignore commercial capital here.
Finally Marx says that financial capital is “fictitious” capital, because it doesn’t really correspond to “frozen labor”. However, Marx believes that financial capital is used to finance the acquisition or the production of other capital goods, so the interest rate has to be between 0 and the average rate of profit.
You ask for human and intellectual capital. If by human capital you mean things like skills, such as being an engineer, this is clearly “manifactured” in schools, and this requires labor, so this is clearly “real” capital. If by intellectual capital you mean stuff like patents and logos, those are restricted by law to sorts of monopolies so they act as “rent-like” capital, but see my discussion of commercial capital in the tweaks. If by intellectual capital you mean the actual research and developement, activity, this can’t be “capital” in absence of a patent system because everybody would replicate new inventions but, if/when this doesn’t happen, this would be “real” capital.

2) TWEAKS
First, does this distinction make sense out of a labor theory of value? In my opinion, yes.
That’s because a lot of capital goods have a cost of production that is fixed. For example if you build a factory, the bricks have a certain fixed price, the robots too, the engineer also have. While during time those prices fluctuate, they can’t fluctuate just at random: if it is expensive to build a robot, the price of said robot can’t diverge from the cost of production THAT much for a sustained period of time. So it is imho true that there is some “real” capital, whose cost of production is fixed, whose supply is quite elastic.
On the other hand, there are goods whose supply is basically scarce, like oil. The price of an oil field basically depends on how profitable that oil field is, so it act like “rent” capital in Marx model [side note – marx assumes that most “rent” capital usually includes some embedded “real” capital like canals, etc. – which is certainly true for oil field that require substantial “real” capital for being used].

So in the end if you express this in non-ltv terms you get to Collin Street’s definition, that there is a continuum between comletely elastic and completely inelastic capital goods. The idea however is based between the difference between “stuff that is produced by labor” and “scarce resources that exist by themselves in nature”.

There is however another important tweak I made, that is that I assume that “commercial” capital and “immaterial” capital like logos or patents can be treated as rent capital (though they are not rent capital, since “rent” here is still used in the classical sense of the rent of the land owner).
For things like patents, those are artificial monopolies so I think that it is obvious that they work similarly to rent capital.
For commercial capital, it is important to note that we live in a period of oversupply, so that the attention of the consumer becomes sort of a scarce resource. Big distributors can then use some sort of “monopoly power” on buyers.
But most importantly for some famous cases like Facebook, Google, Apple, Whatsapp etc., the “immaterial capital” that is the logo (or rather, how famous they already are) also works as a sort of pseudo monopoly: For example, If I created a search engine that is exactly equal to Google’s, and used equal servers and equivalent coders (thus having the same “real” capital), I still couldn’t compete vs Google (cfr. Bing, and it is sponsored by Microsoft, so they have certainly more “advertisement power” that a real new entrant would have).
This is a very important form of “immaterial” capital, and in my opinion it still works like “rent” capital because “fame” it is still a sort of scarce resource.

Thus in the end whe have 4 kind of capital:
1) capital proper, that is produced by labour, that I called “real” capital;
2) Land, that I called “rent” capital;
3) Commercial and other forms of immaterial capital, that Marx ignores but I think work as if they were rent capital (though they clearly are not “land”). Those pseudo-rents are (mostly) produced by the control over distribution, that is a bottleneck today, or by legal restrictions like in patents.
4) financial capital.

But of those 4 kind of capital, only the first one, capital proper, has an independent dinamic, the other three follow, so in my first comment I treated the three as if the were all “rent” capital (since in the modern usage of the term “rent” is applied to all sorts of things and not just to land).
Finally, obviously each business will have some real, some rent, some pseudorent, and likely some financial capital, so you can’t say directly say that Apple is “real” or is just”pseudo-rent”, it will usually be part and part. But it seems to me that a really large part of the evaluation of the financial markets of the value of famous or otherwise already dominant firms is due to the “commercial pseudo-rent” capital, and thus rises as the rate of profit of marginal “real” capital falls.

A drill press is a hunk of steel without the worker, the supplier of raw materials, the documentation of ownership, the manager etc, i.e., the network of social relations in which it is embedded, of which it is a node.

Social relations are neither completely facts outside of us nor metaphors completely imaginary and personal. Social relations are represented by symbols (family, company, nation; property, freedom, time) that are never completely reducible, whose ambiguity is what makes them useful.

The representational and symbolic is the realm of languages: mathematics, economics, music videos.

It’s a start. The disadvantage is that this discourse is no longer good Marxism (see 80) and whoa, grants way to much latitude to its undisciplined obscurantist practitioners. The advantage is that we can talk about a Harvard legacy admission, a CDO, a web site about macrame, a willingness to sit on the beach, and a drill press with some degree of commonality and individual empowerment beyond victimization.

Re bad Marxism: I suspect that this discourse alone would eventually have reduced the LTV to a failed attempt at de-mystification, even if Brad DeLong, et al., hadn’t already been hard at work on it with their sublime collection of neoliberal wrecking balls.

Social relations may be represented by symbols but that does not mean social relations are symbols. The relationship between employee and manager/boss, e.g., is not simply symbolic. Similarly, “family, company, nation; property, freedom, time” are not only symbols. A nation-state, e.g., obvs. has a symbolic dimension, but that doesn’t mean it is a symbol, i.e., “something that stands for, represents, or suggests another thing.” One might say it’s a form of political community and/or a way of organizing authority, so it has important dimensions that are not, or not only, symbolic. As for the last paragraph of 82, I’m not really sure what it means (but I’ve had some wine, so maybe I’ll put some of the blame on that). Signing off this thread for a time.

For all of Brad DeLong’s facile logorrhea, he doesn’t have a workable theory of production either, nor does he have much of a theory of money and finance. Whatever the dubious merits of the LTV, Marx recognized that Capital was a social relation, a power relation and that it operated in the vortex, where money and production, somehow, came together.

Capital is a hard concept, because it escapes our metaphors as it escapes our concrete experience, even as it dominates our lives. It is a chimera, or maybe a manticore, a beast composed of the parts of completely different animals: part money, part finance, a synthetic resource, like land but not land, a commodity but not a commodity, tangible and intangible, social organization and mechanical machinery, a thing that accumulates over long periods, but also an ephemeral that disappears in brief crises.

87: I am a social constructivist approaching a radical nominalism. As J S Mill said there is nothing but names. Marx’s problem is that he remained something of an Idealist.

But back to Piketty! It’s really good.

Piketty mentions that since China (maybe, it’s kinda opaque) does not allow capital to leave the country, it can institute a tax on capital more easily than Europe. Then he asks if Chinese billionaires really own their property. I’ll ask if wealth or property can’t move or seek the best return, is it really Capital? How many local restrictions can be placed before we generally agree it is not property, or maybe has become state capital?

I wrote down a short list of questionable accomplishments, none of which fixate on a labor theory of value:
Okun’s law
the Kuznets curve
the Philips curve
Backward-bending labour supply curve
the environmental Kuznets curve
Efficient Market Hypothesis
NAIRU
Cobb-Douglas production function
Dynamic Stochastic General Equilibrium model
Pareto optimality with a Kaldor-Hicks criterion
equity-efficiency trade-off
the Rostow take-off

Piketty:There are two main ways for a government to finance its expenses: taxes and debt. In general, taxation is by far preferable to debt in terms of justice and efficiency. The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government. From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them

Something the New Keynesians, however much they nod toward Kalecki 1943, just don’t get, or don’t want to get. It is probably even better to tax the 99% than to borrow from the 1%.

The attempt at de-mystification* might succeed though, in my estimation. Among Bob’s examples most seem to be samples of human-wrought stuff-transformation†. The rest, such as property laws, are none too efficient as cause. They’re just superstructural, and show just how fucked you’re all who think that Fake Capital endures‡

In case I am not being clear (which seems very likely, I fear): work is to worth as labour to birth. Fake capital’ll just interfere. That’s to say that those ‘social relations’ are merely imposed limitations (or fetters?) on labour – so wield Ockham’s sabre to slice through these Gordian creations.

What’s left is Stuff (substrate) and Work (though this drives neoliberals berserk). Now: describe; delete money; and if that looks funny, then someone’s contriving to shirk.

@89: Does anyone really believe that Chinese capital can’t leave the country? China is, after all, a weird combo of oligopoly, corporatist state, and kleptocracy. Capital is parked in all sorts of places (such as Vancouver) all the time.

When I’m not being whimsical, I’d that capital is at least as mystical as Bruce Wilder and bob m’s mishpocheh say it is. Nevertheless, even my brief tour through volumes 2 and 3 of Capital left me thinking principally of Marx’s lonely heroism. Brad DeLong may be right in opining that the later Marx disappeared into the hell of the LTV, never to be seen again, but at least he was on his way somewhere important when he did, and try as I may, I can’t imagine Prof. DeLong, had he been around at the time, playing a very credible Virgil to Marx’s Dante.

I don’t think the problem of capital is so difficult. First, it is money value in a process of self-expansion. Second, it is concrete means of production. And third, it is authority over the production process, and a claim on any resulting surplus. Individually, these elements can be found in many social formations. It is their fusion that makes capital distinct.

Mainstream economics mixes up the first two moments of capital, and ignores the third.

Mmm…maybe I ought to leave off smelling the flowers for a while, and get back on the road with everyone else. I’m not very far into the Piketty — 100 pages or so as of this p.m. — but so far I’m finding it fascinating. That actual economists agree strikes me as a modestly hopeful sign, whatever their ultimate judgments.

Thanks again for the detailed response. My first question is can you give me a typical example of “commercial” capital? Because I think your other 3 categories are more or less clear, even if they don’t seem necessarily useful to me.

By “real” capital you mean factories and the equipment inside the factories which is used to produce goods. By “rent” capital you mean land. (Although oil seems to meet some definitions of “rent” capital in as far as it is limited to a finite supply. Oil is of course consumed in a way that land is not so that is a significant difference.) And by financial capital I take it you mean money and other financial assets.

But what about a typical financial asset, say a mortgage? Is this financial capital or rent capital? What if I buy stock in a real estate holding company and receive dividends? My dividends are someone else’s rent payments.

So this brings me back to questioning the usefulness of this framework. (Neither did JW Mason @ 95 seem lucid to me.)

I think “capital” is a sensible idea to the extent that it refers to anything people might want and be willing to trade for. I think that definition is both necessary and sufficient.

A couple of terrifyingly ignorant questions, but I won’t find out if I don’t ask.

1. When Piketty talks about (eg) a per capita income of 30000 euros he’s including, as it were, all capitas, right? (ie. the entire population, not just the amount actually earning said income.)

2. I’m feeling slightly frustrated by the consistent use of mean rather than median. I keep finding myself wondering what the guy in the middle is earning/worth, especially in a book that’s largely about inequality. Am I right that he’s not talking about medians (at least not in the 150-odd pages I’ve read) because they’re not the numbers that are most relevant to the arguments he’s making and the data he wishes to present?

Oh, and can I very quietly suggest that the episteme referred to by Bob M way upthread would be that of market fundamentalism/naturalism – the idea that any inequality is, by definition, desert, and that therefore any attempt to alleviate it would be tropical rain forest or something (whatever the opposite of desert is)?

Now that’s by no means the end of the discussion, but it’s very depressing that economics has nothing to say about this reality, esp. in analysing historical events.

(I think there’s a lot to be said about how in the future renewables and also certain kinds of decoupling could change the importance of this relationship, but the impact of the new “energy technology” (= oil) from 1900 onwards is kind of clear and important.

I’m irritable because I’m listening to the horrible scherzo of Beethoven’s 7th, and have skimmed so many discussions of the meaning of capital that I’m inclined to wonder whether we shouldn’t simply describe capital as inequality.

To the degree that we can’t agree on a definition of capital we can’t measure it. Inequality is considerably more tractable. Politically and economically, it’s what matters. /pragmatist

An important consideration in the modern age is that even if the capital is not exactly real (e.g. you own a house in China that the govt can take away quite easily) if it’s real enough to act as collateral for lending, then in some ways it is “real capital” – e.g. if you have enough houses in China for collateral you can use them to back a leveraged buyout and load the debt onto the company you bought – and if the company makes enough money over time to pay that debt, you’ve suddenly bought a company with capital that wasn’t exactly real…

– Nowhere else in the Global South has the same scale of physical/geographic/human resources. Companies can shift some production from China to e.g. Vietnam/Bangladesh et al. but not all.

– Few of the alternative countries have the internal economic muscle to build the transportation/power infrastructure that makes production really cheap.

All that adds up to some kind of levelling up of wages – even if companies can move out of China to some degree, while labour is cheap elsewhere other factors are more expensive, so there is room for Chinese wages to rise at least to some degree and nothing companies can do about it.

Of course, the hard part for The West ™ is that rising Chinese wages in the short term implies a serious rise in imported inflation…

In reverse order:
“capital” in general, in marxism, is what JW Mason (95) and Ze Kraggash (104) say.
This is different than ” anything people might want and be willing to trade for”, because people are willing to trade for consumption. For example, if you buy a house to live in it, that is not capital, but if you buy it to resell it at an higer price or to rent it to someone, you are not consuming but trying to make money, so that house is capital.

However, Marx believe that the general rules of capitalism only can exist because there is a big industrial sector, that produces a lot of plusproduct. That plusproduct then is shifted around in various ways and constitues the various profits, rents, interests etc.. The exact ways this plusproduct is shifted around isn’t completely clear, and this lack of clarity creates the so called “transformation problem”, that is a famous problem in marxism so I’ll leave it at that.
However the difference between “real” capital and the other kinds of capital is important because only “real” capital creates plusproduct, the other ones just redistribute it.

Re: houses: If you buy a house with a mortgage from a bank, then your debt is financial capital to the bank. If you buy the house as capital (e.g. to rent it to someone), then to you it is both rent capital (because for most houses a big part of the value is just the land, or the place if they are in a favourable location) and “real” capital (since you pay for the building and for manteinance). However during bubbles IMHO the “rent” part is prevalent, plus there is the problem of “speculative capital” that isn’t really considered in this partition of kinds of capital.
In this example part of your rents/profits would be shifted away as interest to the banks, so here we would have:
1) real capital: the fact that an house was built and is mantained – the creation of some real value;
2) rent capital: the fact that the house is, say, in Manhattan, so its price skyrokets well above the cost of production (but this is not really a creation of “real” value, because you just displaced someone else from Manhattan);
3) financial capital from the bank, that siphoons away some of your profits/rents (an example of surplus that is shifted around).

Re: commercial capital is unclear: That’s probably because the first three categories are from Marx, while this one as I presented it here is a tweak of mine.
In my opinion commercial capital, as I used the term, is a form of market dominance that gives to the owner some “rent-like” profits. For example, since Apple is very famous, it can sell iphones that are (imho) overpriced vs their competitor’s products. They can do this because in the past their products were way better than their competitors’, so they now have an “image” that has a lot of economic value. This is an example of commercial capital.
Another example is big distributors that can get premium prices from producers because they control most of the sales channels. While those two examples seem different, they are example of the same thing: since we are in a market that suffers from overcapacity, control over distribution becomes more relevant.
But note that a “market that suffers from overcapacity” and “low rate of profits for marginal new manifacturing capital” are two ways to say the same thing, so the big commercial “pseudo rents” depend on the fact that the manifacturing sector reached some sort of plateau (“overcapacity”).

Re: the usefulness of this approach.
The problem is the direction of causality:
– Is the rentier sector that is strangling the “real economy”? (IMHO Bruce Wilder’s approach), or
– Is the real economy that sputters for some reason, and this causes an increase in relevance of the rentier sector and an increase in the price of rentier capital and in the debt to income ratio? (my approach, that I assume is the marxist one).
Those are two very different approaches.

For example, if you buy a house to live in it, that is not capital, but if you buy it to resell it at an higer price or to rent it to someone, you are not consuming but trying to make money, so that house is capital.

But it is also both. If you buy a house to live in you also have an asset which can be traded at a future date.

Briefly, I think a big problem for LTV-types is an inability to see that value is fundamentally ephemeral. Value is “what people want at any given moment in time.” It can fluctuate wildly, and often does. But what determines value is desire and virtually nothing else. Today I am willing to pay $20 for a Derek Jeter bobble head. Tomorrow, it turns out, I wouldn’t pay .50 cents for it.

Gawd, I hate being behind the curve. I’m barely started on Piketty, yet here come Galbraith and Baker hard after him, and snapping at their heels in turn, the ubiquitous Prof. DeLong. LAst in train, Ct’ers, ever au fait et au courant have already decided who deserves a drubbing, and who elevation to the pantheon.

Tiempo para gastarlas, ‘at’s what I’m in great need of now. Perhaps the organization of a seminar, if Prof. Piketty can be persuaded to participate, would give me time to catch my breath.

Meanwhile, I can’t see, on the face of it, how the Galbraith review has committed any great crimes against either common sense, or the reviewer’s art. Mea culpa.

@mattski 115
That is what Marx calls “use value”, and I think in modern economics is “utility”.
But price is a different thing, that depends on supply, and not just on demand.
This is the reason that I said that the LTV is really an equilibrium theory: at equilibrium, the quantity of the supplied goods will depend on demand and “utility”, whereas the price will depend on the cost of production, because on the long term the supply of most stuff is elastic and the concept of equilibrium implies this sort of “long term” thing.
But, I think that discussing the LTV here is way OT.

I’m late to this, so sorry if this was covered upstrand. Is there an element of the problem here that conflates the micro and the macro?

At the firm or individual level its not overly difficult to stipulate a definition of capital, some of the ones others have proposed upstrand cover most of the ground – financial, labor, process, intellectual capital etc. At the micro level you can then define profits/returns and growth using similar definitional constraints and fairly easily come up with the “r” and “g” metrics Piketty discusses.

Indeed the Gordon Growth Model used throughout standard corporate finance texts draws many of the same inferences about a firm, but only at the firm valuation level. It makes no effort to scale these to even an industry level let alone a national or international macro.

It seems to me at least that where most of the “can’t define capital” and similar arguments come in is transitioning from micro to macro – how should damaging the environment impact “r,” where do common goods like roads fit into capital, is “g” constrained by population growth in the long-run, but perhaps not in the short etc.

At the micro level there is little need to consider any of these which is why one can value IBM or Exxon or Dunkin Donuts using the same r-g/c formula whereas its all but impossible as a comparison between the U.S. , Saudia Arabia and Nigeria.

Apple’s visit to Xerox, and tour of their Palo Alto Research Center, was part of a deal between the two companies – it was in exchange for selling Xerox a hundred thousand shares of Apple. Apple then licensed the mouse from SRI, who had the patent. The claim that both Microsoft and Apple stole from Xerox always struck me as an effort to rewrite history in order to justify Microsoft’s actions.

I should also point out that Apple’s Lisa, released in 1983, used a mouse.

Surely part of the reason is that two quite different ways of thinking of “capital” are running up against each other, and someone like Steve Roth doesn’t seem to notice this. Random Lurker or JWM or whoever can correct me on this, but from a Marxist angle, “our ability to work”, etc. doesn’t sound like any kind of capital, it sounds like what Marx calls labor power. Of course, labor power can be converted into capital, and one might think of it as capital in potentia (or something), but it just doesn’t seem like this is what “human capital” means in contemporary US discourse. Rather, it seems like part of a quite different and possibly incommensurable framework.

127: I think Roth gets it he is just asking a question about what is securitized when student loans are bundled, tranched, leveraged and sold and what does that mean. “Congealed labor power” may not actually be simplifying the question, not the question as to whether Brad Pitt gets 10 million for his labour power, as a rent, his name as asset and seed money.

One of my questions is to degree the return on capital is based on and dependent on political stability, “the institutionalized oppression of the masses” as said in Tinker Tailor. The return on capital was lower 1945-1980 at least in part because of political expectations.

More abstractly there is the Post-Marxism of the New Information Economy, in which we are essentially buying and selling nothing much more than reifications to and from each other from financial instruments to campaign promises to precarious labour-power (which is also precarious for capital). With this much fictitious capital floating around (and political stability is nothing more than a fantasy) both labour and capital have become simulacrums.

Or to approach it another way, Piketty talks at great length about what was “safe” capital in the age of Austen and Balzac: land and gov’t bonds. What made them safe? A navy and police force and limited suffrage? The drawback was the limited supply and fixed return.

So perhaps the secret history of the last two hundred years is to increase the amount of what DeLong likes to call his beloved “risk-free investment instruments.” How did, and how do, stocks become safe?

b. mcmanus @128One of my questions is to [what] degree the return on capital is based on and dependent on political stability, “the institutionalized oppression of the masses”….

‘Political stability’ is sometimes a code word for institutionalized oppression, but it doesn’t always have to mean that. Anyway, clearly investors, esp. big ones, dislike “instability,” meaning, for example, any hint of armed conflict. To the extent that armed conflict tends on the whole to harm businesses and in the worst case destroy entire economies, the aversion to it on the part of contemp. capitalists is fairly understandable.

130: But not just armed conflict, but also the rise of a populist or socialist majority is a threat to capital, and much more common, with obvious examples currently available, mostly in their suppression.

My thoughts were more toward Gramsci than Che. And the Greenspan/Bernanke “put.”

Surely part of the reason for the confusion is that, etc. Tho mcmanus may well be right that Roth does get it. It might still help if he (Roth) or others made it clear that what we have are two quite different frameworks that use the same word, “capital”, but in divergent ways.

It will be a couple of weeks before I have my hands on the book, so I’m running off reviews and comments. First, Piketty is clearly putting the political back into political economy – a long overdue move. Second, the discussion of “capital” and “capitalism” is, IMHO, more obscuring than enlightening. It’s a crossover from an ideological contest, not a useful set of analytic categories. I think Piketty’s definition of capital, as quoted above, boils down to something like “a claim on an income stream” (which could be by via property rights in goods or people, rents, enforceable rights aka feudal dues, tithes, government grants, shares in tax revenue and endless combinations and permutations of these) and his basic observation is that, absent political and environmental counter-forces, such claims will tend to grow faster than the streams themselves. History would support this contention.

Such claims are a feature of a structured (ie hierarchical) society, something for which mainstream economics lacks much theory. It will be interesting to see if the discipline grapples with or evades the issue – I would bet on the latter for at least the next few decades.

and re LFC at 130, there have been plenty of states where the big investors were all for war. Neither the East India Company nor the VOIC were mom and pop enterprises. Bob at 131 is closer to the mark – in a globalised world the prey are not other states (because the rich have, in some sense, shares in all of them) but the lower classes.

Whenever anyone attempts a sweeping look at the dynamics and trends of economic history, it is bound to expose how impoverished are our workaday economic frameworks, concepts and vocabulary. We’re not just confused; we’re asleep and dreaming, until jostled awake — then, still only half awake, then we’re confused.

In our somnolence, in our dream state, we didn’t ask, what is the difference between saving and investment? We didn’t ask, what is the difference between wealth and money? We didn’t ask, what is the difference between return on investment and economic rent? We didn’t ask, what is the difference between an investment in financial securities and an investment in a house or a factory or a law degree or a liberal education? We didn’t ask, what is money? or how does finance work in the economy?

I don’t think Marx had good answers. What’s good about Marx, though, is that he asked the questions. He wasn’t asleep. I am in the camp that doesn’t think he “believed in” the LTV, but I think he believed the oppression of the working class he witnessed, and which he found documented by Parliamentary committees, etc. Maybe, we should be economic phenomenologists for a while, and embrace the energy in the question, recognizing that the answers we have to hand are confused and confusing, but we don’t have to embrace those bad answers to recognize the good questions.

Did Marx believe in the LTV? I like Bernice Shoul’s (1967) explanation, which follows up on Marx’s reference in Critique of Political Economy to “the theory of competition”:

Marx’s answer to the classical question of how market prices based on exchange values can deviate from values is provided by his theory of competition. The transformation of abstract labor values into concrete market prices in Marx’s system is demonstrated by successive stages of analysis more complex than that of classical theory.
…
Marx’s theory of competition is a sharp critique of Ricardo. His own value and price system includes not the two forms typical of classical economics: natural price (or value) and market price, but three forms: value, price of production, and market price.
…
The Marxian price of production, which deviates from value, is the Ricardian natural price. But, according to Marx, commodities do not actually sell at their prices of production. Inequality in the composition of capital and the existence of an average rate of profit establish prices of production differing from values. Similarly, the inequality in the cost price of competitive sellers establishes differences in the prices of production of the same commodity. The price of production which actually rules depends on the distribution of costs within the industry. (footnote: Marx’s argument that the market price will tend to conform to the price of production which is determined by the distribution of costs within the industry is somewhat confused. He argues that the dominating price will be influenced by the number of firms producing above, below, or at the average cost condition, depending on the demand for the particular product. His conclusions are indefinite because of his failure, typical of the time, to realize that the demand and supply for any given commodities are schedules, rather than discrete quantities. With more advanced techniques Marx would have realized that the ruling price of production would be the marginal price, that which just covers cost for the least efficient producer. Elsewhere, he realizes this and refers to the short-run gains made by the more efficient firms.)

In short, the LTV that Marx may have believed in isn’t your grandfather’s (or Adam Smith’s or David Ricardo’s) LTV. Marx’s analysis may indeed have been confused at times BUT NOT AS CONFUSED AS THAT OF HIS CRITICS.

b. mcmanus @131:But not just armed conflict, but also the rise of a populist or socialist majority is a threat to capital, and much more common, with obvious examples currently available, mostly in their suppression.

Are there all that many current (i.e., last 5 or 10 years) examples of “the rise of a populist or socialist majority” that capital has “suppressed”? It’s hard to discern a global rise of such a majority, though there are ‘anti-systemic’ movements here and there, while on a nat’l level such mvts are sometimes tolerated, if unhappily, by forces that in earlier yrs might have overthrown them summarily. For ex., if Venezuela under Chavez counted as such a “rise of a populist majority,” the US, after a somewhat feeble assisted-coup attempt, more or less resigned itself to his regime, and so too, it appears, did multinational corporations, at least for the most part. Correa in Ecuador has not been overthrown and his govt is pursuing a long-running lawsuit vs one of the big oil companies for environmental damage. And the Lula govt in Brazil cut the poverty rate by 30% over the 2000-2010 decade (see J. Abbott in Democratic Left, Spring 2014).

Jonathan is exactly right: capital returns don’t encode opportunity costs, and we don’t have a way to measure capital. But we don’t see capital income either! A portion of income is reinvested before being realized, so the share of household income from capital comes via realized capital gains (and dividends), which makes the connection to the income share of capital tenuous.

According to DeLong, Piketty uses capital prices to measure to avoid the CCC. I don’t know then how to get back to the capital-labor income share as connected to the observed household level inequality.

Just to add – Baker’s argument seems to be that it ‘enhances the bargaining power of large sections of the workforce’ in the US, but even accepting rising Chinese wages and difficulties moving production to other low cost countries, how does that occur in anything but a trivial way ? Or at least for anything but the short term (until other low cost regions improve their infrastructure, the cost gap between the US/South increases again etc) ?
Disclaimer – IAMNAE

I’m about a quarter of the way through Piketty and I’m having a lot of trouble accepting the argument.
Piketty proposes two “fundamental laws of capitalism.” (Is it fair to be suspicious of anyone who claims to be the Isaac Newton or the Josiah Gibbs of economics?)
The first law is α= r x β, where α is the capital income ratio (income generated by the return on capital over the total income), r is the rate of return on capital, and β is the ratio of capital to national income.
You can rewrite this “law” as r = α/β. Or, (rate of return on capital) = (income on capital)/(national) income)/(capital)/(national income).
And through the magic of arithmetic, this becomes r = (income on capital)/(capital). Which is the definition of rate of return.
Piketty himself calls this an “accounting identity.” This seems to be a pretty word for a definition.
So the first “fundamental law” doesn’t appear to be a law at all.

The second “fundamental law” is β=s/g – the capital-to-income ratio is equal to the savings rate divided by the growth rate of the economy.
Piketty doesn’t claim that this is a rule that applies to every economy, he says it is only a state of affairs that economies must approach. In the short term it may not apply.
Not that “growth” means the percentage growth in income – the denominator of β. And “savings” means a contribution to wealth – the numerator of β. The reason the “law” applies only in the long term is that we need to allow the increases in wealth and income to overwhelm the pre-existing conditions of either lots of wealth, or no wealth.
This means that although β=s/g is not literally a definition, it is just as trivial a statement as α= r x β. I don’t doubt that the “second law” is more or less true in conditions of stable savings and growth, although if either savings or growth changes – and why shouldn’t they – then it will take time for the effect to establish itself, and there may not be enough time if growth or savings or both change again.
So it seems to me that the two “fundamental laws” are not laws at all and are fairly trivial assertions that hide more than they show.

Appreciate your remarks. Having read only reviews and such, still, the idea of “fundamental laws” of capitalism doesn’t make much sense to me. Seems to me our epoch of history is going to be characterized by a sort of Yin and Yang of class interest with the poles of “FDR” & “Ronald Reagan” pushing against each other. I do hope FDR is getting ready for an upswing.

@127: What I had understood by “human capital” is that many types of work need some kind of learning or training before a person is able to do them; when a person learns a new skill there is a labour input (the time of the person learning the skill, and — if there is a teacher — the time of the person teaching them), and the output is a person who has a new skill that they can then use (with the additional input of their own labour) to produce something. In a Marxian framework, this looks very like other instances of investing labour to create something that can then be used productively (e.g. building a factory) — hence its a form of “capital”. (But “capital” with the distinct difference that it’s very firmly attached to a particular person — the person who now has the new skill)

No: retailing firms have incomplete terms. Price of what? Call a detective! The marketers’ ads are compelling, and what they suppose they are selling includes ‘aspiration’ and ‘quality’ (sensation). But where are these spec’d? They’re not telling!

Human capital sounds to me a lot like the plutocrats and technocrats busily bumfucking our language yet again, much as they did with the almost universal replacement of the term personnel with human resources. Some usages are less malign than others, I realize, but the subtle reminder encoded in all of them is that we don’t own ourselves. True in the larger sense, perhaps, but we damned well will have at least some say in the uses to which we will be put. The collective that Mr. Koch has lately been railing against is, after all, a collective of subjects, not objects, no matter how overwhelmed he may be by his own dreads and desires.

“Human capital” is really more a topic for Corey Robin, a product of the reactionary mind as it were, a rhetorical trick to facilitate false attribution, that is to make plausible a false marrative, where wages and productivity are a just result of the independent power of personal virtue, rather than an epiphenomenon of social organization, social structure and political power.

i.e, the crossroads where the devil comes to get you, the rubber meets the road, etc.. The difference between (false) libertarians, (false) management experts, and (true) Wilderian realists comes down to how we define the relationship between the individual and the collective. Nobody’s got that right yet, I think, but the puzzle pieces of an effective configuration are lying all around where history has abandoned them. We’ve just got to put them together again — which is exhausting work even if you can get it.

#145 – as I say, I’m only 1/4 of the way through, so I can’t comment intelligently on everything he says.

But almost all the reviews and comments I’ve read go straight to the predictions and the policy implications. No one that I’ve seen seems to address the detailed structure of Piketty’s argument critically. Baker does in a general way, but he doesn’t take on the specific steps of the argument.

Piketty argues that there are “laws” of capital that play out in the data. He then has lots of graphs presenting huge amounts of data that is presented in a way that is designed to illuminate his theory. That is, he presents the data in terms of the very laws expressed in terms of simple ratios – α and β – that he thinks explain and predict capital formation and its relationship to income.

Now, the first fundamental law is not a law – it’s a definition – so it has no explanatory power.

The second law, it turns out, does not apply to most of the 20th century.

Piketty’s argument is that the 20th c is an exception to the law because of the unusual circumstances of the WWI-depression-WWII period and the huge changes in population growth. He says that now that we’re through the 20th c the 2nd law is re-exerting its power.

But when the second law works only when growth and savings remain stable over long periods, why should we assume that it will explain the 21st c? Put another way, we know that history trumped the 2nd “law” in the 20th c, so why should we assume that there will be no history in the 21st c?

Maybe Piketty answers this question. I’m still reading. Maybe I’m misreading, and I genuinely would like to hear from people who are better economists than me (i.e. 90% of the world). I’m skeptical, that’s all.

Alot of bad history and bad policy has been created from assuming that the 1929 – 1971 period, ecompassing the Great Depression, World War II, and the post-war economic and population booms, as the norm when it was really exceptional and anomalous. All Piketty seems to doing is pointing this out in a fairly gentle way.

We have to get out of the habit of thinking that “it didn’t work between 1930s and 1970s” automatically shoots down any theory.

Right, that’s one way you could make sense of it, and I think Random Lurker may have suggested something similar upthread. But if one assumes a Marxist framework, Sandwichman’s 149 is about right I think.

Well, ok then. Something bigger and more horrible than WWII is coming, and what’s the big deal? Ho-hum.

That’s the freaking point, Kevin, the Marxian point if I may say so. Piketty wanted to make the catastrophes inevitable and choices irrefutable. (Drum does punt to robots, or cargo-cult Andromedans, or something else so he doesn’t have to confront the moral decision. Maybe something will come up?)

There is a profundo basso in the Piketty, just pretty constant quiet whisper:”And this will not end well.”

Inegalitarian slave-hell, the usual bored patrimonial billionaires playing with their military toys, radical socio-political change, or liberals can start taking responsibility and raise a little hell. Or billions will die.

And for those above, the standard Marxian explanation of human capital is “congealed” or historical labour. Just as a hammer is labour congealed into capital so is an engineering degree.

There remain technical questions about whether the creation of human capital is part of production or reproduction, organic or subsumed.

Is the unpaid mother teaching her child to get up in the morning reproducing labour power? Or is she part of the production process?

Post-Marxism or Post-Capitalism says that the economy and production process has gotten intellectual and immaterial enough that it no longer matters. The reproduction of ideology, consumption, “private life” is subsumed in the production process so much that capital and labour are no longer distinguishable.

‘Real Capital’ (econ.), after Smith has meant: stuff one makes more stuff with. Its roots in accounting for cash on cash mounting saw both merge in one monolith.

Marx wrote of capitalism, and noticed the gross fetishism: the social relations whose strict operations naturalised parasitism. He treated the term, in invective, as incorrigibly defective. From that induction stemmed ‘means of production’: equivocal language corrective.

But since, econ. usage reverted (though its use was still just as perverted). There is human capital; a boss needn’t sap it all, even when into goods it’s converted. We all know that Real is Best – so don’t throw it out with the rest. Just don’t use their system (Fuck ’em! No; ‘fist ’em!) it isn’t their stuff to invest.

If ‘capital’ means that activity*, actuality makes a captivity. Uncritical analysis: political paralysis. Bob’s comments† may have reflexivity. What starts out as faithful description decreases the scope of prescription – just like ‘laws of nature’, this fixed nomen-clature embeds a grotesque misconception.

The fallacy’s quasi-pathetic: that money and ‘rights’ are kinetic. The operant technique is cloaked in mystique – ungrounded in facts cybernetic. With ‘Capital’ a portmanteau word, we’re left to conclude the absurd. Contracts and plant: spot the difference! “We can’t!”. Time to stop buffing this turd.

Rejecting that false episteme isn’t ou-topian (or ‘dreamy’). Such ruling-class ‘verity’ has given us ‘austerity’ congenial to, say, Mussolini. The world, for the quietist Quinean or “leave all as is” Wittgensteinian, is not even strange – but, for Marx, it needs change: that’s the point, and it isn’t a tiny’un.

*”M-(C-)M” is one notation; M is magic; C, creation. This is not like Kant’s Deduction, nor an outline of production: it describes the money power (which infects the ivory tower). We’re furred up with filthy lucre, clinging like a mouldy mucor. Don’t believe the two-faced libel of the double-entry bible: if we will not model ‘money’, worker bees get sod-all honey.

“Human capital” is really more a topic for Corey Robin, a product of the reactionary mind as it were, a rhetorical trick to facilitate false attribution, that is to make plausible a false narrative, where wages and productivity are a just result of the independent power of personal virtue, rather than an epiphenomenon of social organization, social structure and political power.

I strongly suspect — though am not certain — that this is wrong as intellectual history and that the term “human capital” really came into widespread use because it was picked up by development economists and those in similar subfields. The idea that the term is a creation of conservative ideologues, and/or was simply a way to rationalize inequality and flesh out the marginal productivity theory of income distribution, is, I think, not right. However, if someone points me to contrary evidence I will stand corrected. (And after posting this comment I might even do a little research on the matter, though chances are I won’t.)

Just as a hammer is labour congealed into capital so is an engineering degree.

I get the reasoning that would lead to this sort of conclusion, but it still seems like a rather strange thing to say. Leaving aside Sandwichman’s point about the alienability of capital, which I think is right, this view would seem to imply that every educated worker is an owner of capital in his or her person. Which—from a Marxist angle—seems a quite strange result.

Kevin Drum in his post on Piketty:
“Or maybe war will once again take care of things.”

Not likely, for reasons that have been hashed over here and elsewhere. The notion that the world would go through a re-run of WW2, which killed (on one estimate) somewhere in the range of 50 million people, in order that ‘g’ can be more than ‘r’ during the post-war reconstruction, is ridiculous. Some other way will need to be found to “take care of things.”

A hammer is just a tool. It is not inherently capital although it may be capitalized. What makes that hammer “capital” is a discounted stream of future earnings imputed to it over and above replacement cost as it wears out.

The fact that a hammer has labour congealed in it doesn’t make it capital any more than a shoe or a hat is capital. The fact that skilled labour has labour congealed in it doesn’t make it human capital.

this view would seem to imply that every educated worker is an owner of capital in his or her person. Which—from a Marxist angle—seems a quite strange result.

Why? Is it so far from something like “the worker is free to sale/rent her labor-power to the capitalist?”

The point that liberal capitalism freed the medieval serfs/slaves to sell their time (labor-power) as a commodity has always been important to Marxism. It is the alienation of a part of self, self-objectification, becoming a thing (or a carrier of a thing) in order to put it/self on the market.

The Post-Marxists autonomists* have just taken it a little further, in which we also sell our skills at personal interaction, our learning ability, our drug-free lives, our optimism, our hobbies and recreational preferences, our genders, ethnicities, nationalities, stable family life etc. to capitalists in a intellectualized and further socialized consumption/production/communication/information economy. But this process of self-reification is dialectical, and has also made us freer, since although we must objectify ourselves, we have a lot of latitude as to particular forms. Difference sells now.

“You are not the consumer, you are the product.” Producing and consuming yourself

In reality I possess private property only insofar as I have something vendible, whereas what is peculiar to me [meine Eigenheit] may not be vendible at all. My frock-coat is private property for me only so long as I can barter, pawn or sell it, so long [as it] is [marketable]. If it loses that feature, if it becomes tattered, it can still have a number of features which make it valuable for me, it may even become a feature of me and turn me into a tatterdemalion. But no economist would think of classing it as my private property, since it does not enable me to command any, even the smallest, amount of other people’s labour. A lawyer, an ideologist of private property, could perhaps still indulge in such twaddle.

I am even farther behind in reading the book than you, I’m afraid, though I paddle upstream a bit further each day.

My first reaction to r > g is that the extent to which r is greater than g is a measure of how usurious and extractive the financial system is. It may well be an historic “norm” in the sense of a state toward which the anacyclosis of civilizations regularly, though regrettably, returns: a stasis of extractive oppression.

I am even farther behind in reading the book than you, I’m afraid, though I paddle upstream a bit further each day.

My first reaction to r > g is that the extent to which r is greater than g is a measure of how usurious and extractive the financial system is. It may well be an historic “norm” in the sense of a state toward which the anacyclosis of civilizations regularly, though regrettably, returns: a stasis of extractive oppression.

Within the academy, it was a vehicle of inter-disciplinary aggression, but in the popular political discourse, I think it has been largely as I said. It is one of those seductive terms, which invites people to project their personal notions, while overlooking the social uses being made of the argument.

bob mcmanus 168The Post-Marxists autonomists* have just taken it a little further, in which we also sell our skills at personal interaction, our learning ability, our drug-free lives, our optimism, our hobbies and recreational preferences, our genders, ethnicities, nationalities, stable family life etc. to capitalists in a intellectualized and further socialized consumption/production/communication/information economy.

Not sure I agree w this, but it is one of the clearer sentences you’ve written on this subject, so I appreciate that.

Sandwichman 169It’s precious how folks who are deeply offended by the very idea of a labour theory of value swallow rhetorical snake oil like human capital without blinking.
Speaking just for myself, I wasn’t swallowing it or opining on its validity; I was querying B Wilder’s account of its intellectual origins. One can of course discuss the history of an idea even if the idea happens to be complete and utter bullshit; one can also discuss the history of an idea without taking a firm position one way or the other on whether it is bullshit or not.

One of the essential characteristics of “capital” investment is that it tends to be largely a sunk cost investment, the return on which will consist largely of economic rent.

An economic rent is that portion of factor income, which is in excess of what is necessary to bring the factor into productive use. In other words, efficiency does not require that we pay, and the income flowing to past capital investment is negotiable, a matter for political dispute.

Capital cannot simply accumulate as a stock, it must also sink. If it doesn’t, growth must come to a halt.

Has anyone read Lane Kenworty’s new book, out of curiosity ? On social democracy in the US ? I’d guess some here will hate it (he finds solutions short of apocalyptic, 1 billion dead war ; ) – I assume. I havent read it )

I’m not sure what to say about the securitization of student loans, but I take it that the key point in that quote from the German Ideology is the bit about being able to command other people’s labor. Whatever ‘human capital’ is supposed to be, it can’t do that — except in the somewhat tenuous and indirect sense that I can sell my labor in return for wages which themselves are extracted, ultimately, from other people’s labor. But that’s surely not enough to speak of me owning capital in my person, because otherwise you get the result that the commodification of labor straightforwardly implies all labor power is (a species of) capital. Which is utterly mad.

IMHO, a level of education (“skill”) above the average can be considered [mini-]capital, and this includes useless titles used as credentials (because, the economic system is not THAT smart, so error is part of the system).

A level of education that is presumed of everyone (say, high school), cannot be considered capital, but “reproduction of the working class”. Those people will be considered “unskilled” (though, obviously, they aren’t).

Education is so obvously a form of capital, that people take loan to have it, on the expectation that the cashflow from it will be higer than the interest the pay on debt.
Wether it is “real” capital or “pseudo-rent” capital I don’t know (I think that if enough people get an engineering degree, they will just do jobs that don’t really need those skills, but they would displace non engineer guys, so they would get a rent of sort, but at the expense of someone else, not really productive capital).

You must have missed the Enlightenment and Industrial Revolutions. The Capitalist is not the slaveowner, she does not “command” anything. That the worker conditionally rents/sells her labor-power to the capitalist is very important, for instance to union movements.

The actual living freedom of the worker is an essential fact for Marxist. How we gonna Revolution without it?

Okay. Are we off topic. Piketty has his own definitions and discourse, which I hope is politically useful. But others have utility. I won’t attribute the following to anyone.

A) Labor creates and maintains Value/Capital
B) Power is everywhere, although not evenly distributed, thank god. We need gradients for Revolution. B first.

I have said before the important question is: “Why don’t they rise up?”

Foucault was pushing hard against the Right, but also against the calcified Marxist/Communists in France and the Academy. I wonder if he read Jacques Ellul.

We the People/workers are dynamically (re-) creating right now the hegemony, false consciousness, ideologies (like also homophobia and sexism). Not those jerks over there, or the Powers That Be, but us. Right here. Right now.

Once you buy that, a lot of other stuff falls into place. “The ruling ideas are the ideas of the ruling class?” But in Late Neo-liberal Capitalism, we rule more than any previous society. “Capitalism is the sum total of existing social relations?” But we are creating the social relations under conditions of distributed power. Gay marriage moved fast, hard to say we are powerless.

But Capital “commands?” Well, we aren’t full socialist/communist yet, or at least we say we aren’t.

So Capitalism has yes merged with labor (or labor has fully bought the neo-liberal dream) and subsumed everything, public and private, collective and personal. This is what we are watching. Resistance is not only futile, it will be televised by Faye Dunaway.

It’s precious how folks who are deeply offended by the very idea of a labour theory of value swallow rhetorical snake oil like human capital without blinking.

Slow down there, partner! “Deeply offended?” Where do you get that?

And what is it about the idea of human capital that you find so absurd? If you were shipwrecked on an island wouldn’t you be grateful if one of your two dozen companions was an MD? What if one of your companions was a gifted musician (with an instrument!)? Are you arguing that special talents/expertise aren’t special? Why would you do such a thing?

I think it is important to distinguish between human dignity, which everyone has, and human talent/skill/knowledge, which are not equally distributed. Denying that some people have more valuable talents and skills than others is a denial of reality. We on the left shouldn’t do that.

It’s what popped into my ‘ed at the time. A more poetic expression would have been “gag on.” quoth DeLong:

“I have long thought that Marx’s fixation on the labor theory of value made his technical economic analyses of little worth…. Thus he vanished into the swamp, the dark waters closed over his head, and was never seen again.” [Except of course by Joe Stalin, Pol Pot and Kim Il Sung who religiously followed Marx’s presumed fixation on the labor theory of value “down very strange and destructive roads.”]

Sounds “deeply offended” to me, bucko.

If I was marooned with a physician and a musician, the very last thing I would wish for is to have them administer their talents as “human capital.” Obviously you’re not using the term in its precise technical sense but under the influence of some impressionistic public relations feel-good cachet.

I said above I thought capital is a coherent idea when thought of as anything we would want enough to trade something for. Someone mentioned that a consumable good was different than capital. Well, yes & no. When a consumable good is in a warehouse or on the shelf of a store it represents capital, clearly. If I buy a dozen eggs chances are I’ll consume them but if my neighbor begs me to sell them to him then they–the eggs–are behaving like capital, perhaps even if I sell them for what I paid for them. ?

I want to go play a round of golf. The course I go to play represents a huge effort on the part of the owners of the course, also the designers of the course and the builders of the course. I am happy to give them something for the privilege of playing there.

I want to go visit the Metropolitan Museum in Manhattan. I am happy–mostly–to pay to get in there. There is huge cultural capital in that building. I want to go watch a popular band play live. Happy to pay to get in. Professional and semi-professional sports also. Seems like “human capital” to me.

Interestingly, human relationships are not like this. We don’t want friendships or intimate relationships to be mediated by trades. It would be possible to argue that such relationships *are* mediated by trades, although a different sort of trade, trade in kindness and attention. But that, to me, does seem a qualitatively different sort of thing.

I think that in the Utopia that many of us idealists believe is possible and/or inevitable, most interactions would tend to approach the “human” model as opposed to the “commercial” model. But I also think that world is too far down the road to serve as a useful guide for today.

I did. I don’t see what you’re getting at. Rather, it sounds very similar to what I said, that capital is anything somebody might want enough to trade something for.

If I was marooned with a physician and a musician, the very last thing I would wish for is to have them administer their talents as “human capital.”

I don’t understand what you’re saying. You wouldn’t want the MD to contribute his knowledge and skill towards your physical well-being? You wouldn’t want to hear the musician play? You know, the ‘deserted island’ thought experiment is only meant to emphasize the value of these peoples special talents. We wouldn’t be “paying” for their services on the island because of the extremity of the circumstance. But in normal life we’re happy to pay for special skill when that skill is just what we want.

Subjecting the petite bourgeoisie to debt peonage in exchange for the college education, which is their status identifier is cruel, and is also unwise economic policy, because, by conventional standards of economic analysis, it should not be possible for the individual educated person to realize the additional income, to fund the debt incurred. Using terms, like human capital, and talking rubbish about the potential of technical vocational training, is suppose to obscure insights about the actual incidence of the increments to income, which arise from educating a population. Education, as an economic resource, is not a “skill” or personal trait; it is a common wealth, a characteristic of a society and culture. It is not a hero — a John Galt, Henry Ford or Bill Gates — it is a capable population: the vast number who are ready to become auto mechanics in 1910 or computer enthusiasts in 1980. And, the gains diffuse throughout the economy. Indeed it is landlords, who realize most of the gains from the collaboration of educated people crowding cities.

At best, a credential, as a rent-seekers’ device, might allow the individual to realize a return, but only at the cost of the sclerosis, credentialism entails.

Finally, of course, debt peonage must sink the individual into a pernicious combination of risk-aversity in major life choices, and desperate futility in minor ones (prayer & lotto). Desperate gambles, just as socially destructive are the alternative for the individual.

1. ‘Human capital’ is inalienable—I can’t transfer possession of it to another person.

Yes and no. You can study with a professional to gain professional skills. You can train with the help of more experienced, more skilled individuals to become highly proficient as an athlete, an artist, etc. If you have innate talent so much the better but learning the violin from a master is a form of transfer.

3. If indeed specialized training is a form of capital, then every unemployed and underemployed comp lit PhD out there is an owner of capital(!)

That’s correct. And they may soon be employed, just as an idle factory may soon start producing.

If
You
Insist
Capital’s
Private Property
Or indeed a flow of income
We can use a thinner concept: ‘means of production’.
If there are human ‘means of production’, that might even help with the labour theory.
How else is one to explain the fact that skilled labour “creates in equal times proportionately higher values than unskilled labour does”?

I could be wrong, but it seems to me the only person strongly (or even lukewarmly) contending that ‘human capital’ is a sensical category w/in a Marxist framework is b.mcmanus. And as should be evident by now, mcmanus is operating under the influence of ‘the post-Marxist autonomists’ (with whose work I am and prob. will remain unfamiliar) who apparently think that labor and capital have in some sense merged (see @160) and that workers sell other ‘qualities’ or commodities rather than only labor power (see @168).

This is of course in direct contradiction to the basic (or what I always took to be the basic) Marxist point that the proletarian condition is defined by having nothing to sell except one’s labor power. (Of course today many people sell their labor power and also own some, usu. smallish amt of, financial capital, but that’s a separate point.)

The problem is that mcmanus has gone, as he put it upthread, beyond economics to social theory, but he seems unwilling or unable to offer an account of his social theory that has some reasonable amount of empirical or conceptual precision and clarity.

Earlier I said I thought this sentence (mcmanus @168) was relatively clear –

The Post-Marxists autonomists have just taken it a little further, in which we also sell our skills at personal interaction, our learning ability, our drug-free lives, our optimism, our hobbies and recreational preferences, our genders, ethnicities, nationalities, stable family life etc. to capitalists in an intellectualized and further socialized consumption/production/communication/information economy.

but on further reflection I really don’t think it’s very clear, and what is clear is exaggerated. And the rest of the remarks in this vein are less clear still.

In sum, the problem, it seems to me, is a bunch of dubiously supported claims (e.g. labor and capital have merged), coupled with quasi-truisms (e.g. power is everywhere) that yield the conclusion that the only remedy for the current situation is some kind of cataclysmic revolutionary conflagration (“burn everything,” to paraphrase mcmanus from an earlier thread).

If capital and labor have ‘merged’, then labor can no longer organize in opposition to, or rise up against, capital; rather, the only remedy is to take a giant match, burn everything down, and start again from scratch. This is obviously infeasible and, even if it were feasible, would not be desirable since there is no assurance that having burned everything down and started from scratch, the eventual result would be any better.

Ok, look: you can define ‘capital’ in any way you want — you can define it as just any resource, or you can define it as anything anyone might want, or anything anyone might want enough to part with something they have in exchange. Frankly, you could define it as a dog’s ass. I am making a limited, conditional claim: if you accept anything like a Marxist account of capital, one that is undergirded by an account of a certain mode of production that brings with it distinctive class divisions, etc., then the notion of human capital is not particularly sensical. Leaving aside my very first comment on this thread, I haven’t even attempted to engage people who are quite unconcerned with the antecedent.

@bob
One commands a price from the market, not the worker. It’s an old idiom.

Also: suffering the process of discipline necessary to become a worker, presenting oneself in a way that is orderly and submissive (or enthusiastitc, or ‘disruptive’), having the necessary skills for a job, etc. are not new requirements. At the same time, as ‘marketable’ as I might or might not be, my shabby coat and broken glasses are not part of my ‘human capital’ as far as the market is concerned, nor are they a form of wealth, and they are certainly not part of any identity I have chosen to consume; yet warmth and eyesight remain necessary for the reproduction of my labour.

Italian feminist communists in the ’70s used to argue that the placement of women’s domestic work outside of the market was a feature that benefited capitalism by reproducing authoritarianism and paying women below market rates; capital and non-contemporaneity make excellent bedfellows. Likewise, China faces interesting times once it creates a proper working class that must be reproduced by wages and market commodities alone, not a horde of first generation workers with one foot in the village and one on the shop floor.

Marx notes somewhere that, in order to reproduce his labour power, the German worker ‘needs’ beer while the French worker ‘needs’ wine. These are not marketable needs, but neither do they exist outside of the market.

If capital and labor have ‘merged’, then labor can no longer organize in opposition to, or rise up against, capital

How has it been doing lately?

the only remedy is to take a giant match, burn everything down, and start again from scratch.

Oh, call it an initial negotiating position, or a threat to get them to run to Savoy with their jewels, or a 2 x 4 to get the liberals to stop looking under rocks for zombie Bill Haywood or the ghost of Frances Perkins. Or my promise to not pull the Beemer into the garage and tweet nervously with my 500 dollar pad when London starts burning.

The actual plan, one I am hesitant to disclose for fear of Vanguardism and stray heroics, is to a) go Bartleby, withdraw our services and stop producing anything, including discourse and organization, and b) declare communism, it will only come when the 99% say it is already here. That also involves as much expropriation is I can get away with and as much sharing as I can handle.

200: Oh, I recently read Resnick and Wolff jumping through hoops trying to explain how about 90% of the economic activity and labor was subsumed and serviced the 10% that was industrial production. Or that, since you mention the feminists, that domestic labor wasn’t even within capitalism at all, but in the feudalism of the patriarchal household.

The clinging to productionism by old Marxists in this post-modern economy of information commodification (why is Amazon so valuable?) is no longer tenable in the way it was even in the 1950s.

I have lots of things. But much of my money (earned manipulating data) is now spent on data and the pipes producing and consuming identity.

When I was a young whippersnapper, freshly embarked on a course of study in chemical engineering, one of my profs announced that the single most reliable measure of a nation’s level of civilization was the amount of sulfuric acid it produced. I wonder, does anyone today, even those teaching chemical engineering courses, still believe this?

No doubt we still need tons of the stuff in order to make Apples and Androids and Teslas, Yahoos and Googles and Amazons, but it’s a substrate, no longer a crowning achievement, and as was the case with agriculture not so long ago, making tons of it no longer requires the kind of labor power, human capital, etc. it once did. Maybe if it did there’d be less mischief in the world, but going backward, while it may be an option chosen for us as a reward for our heedless profligacy, is hardly an option anyone in their right mind would choose for themselves.

Hammer, by itself, is a commodity. Labor-power is also a commodity. Engineering degree is a characteristic of that commodity. Your engineering degree does not yield any surplus value for you, and therefore it’s not your capital. It does get you a higher wage, but no surplus value, sorry.

@William Timberman 208
Ok, but now our factories are just relocated in China, it’s not like we have less of them.
Take, for example, Google’s business model: it gives its services for free, and it sells advertisements. So its cashflow is just the advertisement of other, more material, businesses. And Google, Facebook etc. are basically global monopolists of the awesome postindustrial industry of the future, so if you think of it they are making very few money vs the hype.

@Ze Kraggash 209
” a higher wage, but no surplus value”
How do you differentiate between an higer wage and surplus value? Just curious (I think that “human capital” is capital, but I’m ready to change my mind).

PS: surplus value – If we see all profits as a sort of rent, and that this rent is deducted by all work, then it is possible that someone gets some of this surplus, but less that what s/he paid as a rent.

For example, suppose that, in LTV terms, 1h of labour produces 100$, but the hourly wage for unskilled labour is just 50$/h. This means that 50$ of surplus are created in each hour of work. But then comes an engineer, and s/he gets 95$/h!
In some sense, s/he is getting – 50$ of “pure wage”, 30$ of repayment on his human capital, and 15$ of profits on his human capital – so ha is getting 15$ of surplus value/profits. But these 15$ are much less than the 50$ s/he alrerady ceded to the boss, so still looks very much like a worker even if s/he gets almost twice the wage.

“In some sense, s/he is getting – 50$ of “pure wage”, 30$ of repayment on his human capital, and 15$ of profits on his human capital – so ha is getting 15$ of surplus value/profits.”

I believe he’s just getting $95/hr wage, determined (theoretically) by the supply/demand balance for this particular kind of labor-power. If there are too many engineers (who want to do engineering work) and not enough box-haulers, the box-hauler may be paid more than the engineer. And then what’s his “human capital” he is “profiting” from? This is just idiomatic usage of terms.

Ok, but if there are too many engineers, then there is a huge educational industry that is churning out useless skills (useless in the aggregate), so this is more a problem of capital misallocation than of “non-capital”.

PS I realise that the engineer in my example could be exploited even if he made more than 100, because of the repayment on invested educational capital.
This happens because he can’t resell his educational capital once he retires.

Matthew Yglesias’ take on Piketty over at Vox is interesting: if r > g, don’t tax the rich — it’s politically impossible. Instead, give growth a noodge by adjusting tax, etc., incentives so that everybody makes more babies. I oversimplify for the sake of venting my leftist wrath, but c’mon, Matt….

Why do you invariably think it necessary to claim that technocratic management, not politics, is the way to salvation? Is it really to avoid bob mcmanus’s guillotines, world wars, etc? That might be admirable from a purely Buddhist perspective, but if instead its purpose is merely to preserve unruffled the privileged and their privileges, shouldn’t we look for other means of non-disruptive disempowerment of the burgeoning plutocracy, i.e., specifically political ones? And why, oh why, are you so bloody eager to do them a favor anyway? Haven’t they champions enough already?

William Timberman @ 214
MY has resigned himself to a career writing for a plutocrat’s media.

Random Lurker & Ze Kraggash

In my terms, you are confusing the political capacity to charge for something, which may involve creating an artificial scarcity and is essential to funding debt (aka capital), with the capacity to produce goods. In Marxist terms, you are missing the inherent contradiction, when you fail to maintain this distinction. The capitalist is augmenting the means of production, amplifying the capacity to produce a surplus of goods, and scarcity and poverty, in order to profit by it. It’s a contradiction. More stuff; more poverty.

@Bruce Wilder
Yeah, I understand this point. But my point is that capitalists arent really incresing scarcity: this happens, for example with patents, but I believe this is a minor thing.

For example, IIRC, during the housing boom the price of houses went up much faster than the actual rent of the same houses. My intuitive explanation for this is something like:
– the actual rent of houses is limited by the wage of workers, who are the ones who are going to pay the rent after all;
– since houses are a sort of rent capital, their price as capital is inversely proportional to the average rate of profit, something like =
[yearly rent]/[average rate of profit] = [price of the house]

So the rents are fixed, but the price of the house rises, because the other investiment options have an even suckier rate of profit.

In this story, capitalists didn’t really increase the scarcity of houses, but still the kind of rent/speculative capital that is in housing looks bigger, and so it looks like if it is the FIRE giant squid (Firesquid! a new supervillain!) that is profiting and sucking away wealth from the people.

However this story implies that, for “some reason”, the rate of profit that is supposedly determined in the manufacturing sector fell.

Why did it fall? This isn’t very clear to me.

Three different ideas:
– we reached a technological limit of sorts, so there is no demand for new [real] capital that exceeds replacement of old capital;
– it is a demand problem, caused by the fall in the wage share of income, caused by globalisation/politics;
– it is the capitalists who are increasing scarcity more than what I think, the Firesquid!

If it’s not clear, by “surplus value” I meant the value produced by labor above the labor cost. Capital is the means of extracting surplus value (profit) from labor. Engineering degree does nothing of the sort.

Money and finance is the complex system by which we keep score. It enables people to be rational in economic decision-making in the base and literal sense of calculating comparative ratios, and making material choices and setting the terms of cooperative activity, accordingly.

During the housing bubble, the price of houses went up much faster than the actual rent of the same houses, because banks gave out loans to people, who should not have qualified on the basis of their actual incomes, and then repackaged the loans as “safe” securities to be sold on financial markets. The institutional mechanisms, which should have kept housing prices and residential mortgage-backed securities prices accurate (roughly in proportion to local household incomes), broke down. Some economists might say this was a market failure involving asymmetric information and the corrosive effect of the (US) government’s guarantee of bank deposits (FDIC), and implicit guarantee of mortgage-backed securities (thru Fannie Mae, etc), and they wouldn’t be entirely wrong. I would say it was a failure of hierarchy, the failure to properly appraise the value of real estate, to rate securities, to underwrite mortgages, etc. — all carried out by institutional hierarchies of regulatory control. (And, some economists — the ignoramuses and corrupt, sociopathic bastards — would say that markets are magic and no one can see a bubble and these things happen as they have always happened and there’s nothing anyone can or should do.)

Anyway, the point is that money is an institutional mechanism for conveying information — feedback and signals — and facilitating calculation and making deals and contracts. It is artifice, but potentially very useful artifice in coordinating variously decentralized economic activity. Piketty’s “r” is a symbolic summary representative of the results from the operation of this artificial, institutional system. “r” is fake. a simulacrum of “g”. To get r > g requires that the artifice become parasitic and extractive; it requires lies and fraud in a system for generating and conveying information.

Anyway, the point is that money is an institutional mechanism for conveying information

Pointing at nobody in particular, I might suggest that there is still a layer of re-ification around here. Capital, labor-value, surplus, commodities are not things, but social relations represented, and only existing (as opposed to a hunk of steel or eight hours of time) in words, language, communication…information.

I just can’t seem to get away from seeing the commodity as not having exchange-value intrinsic to it or as its essence. Value does exist “inside” commodities or capital. The factory or worker is exploitable because of a chain or network of documentation for one instance (and a subject-position of the worker in relation to the owner for another) that attributes “ownership” to a person or corporation. It is capital not because it is “surplus-value created by labor-power” but because we say it is.

So Capitalism is nothing more or nothing less than an information network and communicative process.

This is to me more material, concrete and historical. Marx remained an Idealist in his reified categories and classes.

@Bruce Wilder
And why this epidemy of unheticness? And did the same happen in Ireland, Spain, Greece and Italy? Those four have four very different patterns of debt imho.

@Bob Mcmanus
I have a degree in “scienze della comunicazione”, which in english would be “media studies” or “communication” I suppose. When I was at university I had to study a lot of semiotics and sociology of communications and all this stuff.
We had also books about fascism propaganda in our history course, for example.
And here is the thing: If you see, for example, Goebbles’ “documentaries”, for example, they are really stupid, and wouldn’t fool a teenager. But the nazis had a monopoly of information, so in a few years they persuaded everyone. Something similar happens imho with commercial ads today: nobody really believes that if you use nespresso all woman will love you, but in the end we are so filled with this kind of message that we end believing it.
This kind of construction of reality is really a problem of comunication firepower, which requires economic or political power.
Goffman (another guy I had to study) wrote a lot about this construction of reality and framing, and used the concept of frontstage (when our significant interaction take place) and backstage (when we prepare the tools we will use during the frontstage).
But he never tackled, IMHO, the economic problem of the backstage: if you want to present yourself as a reliable succesful guy (frontstage) maybe you need an Harvard accent, and that is expensive (backstage).
All this long comment to say that, while at some level you are right that everything is a social contruct, the process of construction still follows the usual materialistic laws of power and money (or, the superstructure and the substructure determine each other, but the substructure is more equal than the other).

Well, yes, of course. At base, and naturally, value is personal, in our hearts and in our friendships and familial relationships and shared experiences, but production at scale is accomplished by specialization and social cooperation on impersonal levels. Specialization means producing a lot of stuff we don’t need and to spec’s that have nothing to do with the needs of the individual doing the producing. So, to make it work, we have to construct a de-personalized language and culture, that allows a modicum of trust and coordination. We have to believe that the restaurant-owner and his chef, who are not our friends or relatives, who are cooking and serving way more food than anyone should want to make in a day, really do value our experience as diners, and are not so alienated from their work, or from us, as to be indifferent to the prospect of poisoning us with food they themselves may have no interest in eating.

I’ve never understood how anyone can look around at the world, and buy Hayek’s story of a market economy of anonymous vendors coordinated solely by price, freed by the magic of the market from all authoritarian rule-making to allocate resources in the best possible way in this best of all possible worlds. Money and finance and price are important, because they facilitate calculation, but they exist in a culture thick with rules and rule-making, as we struggle against the human propensity for alienation and strategic sociopathy in a society too large in scale to make use of our natural empathy for people we know and live with.

If I were Hume, and inclined to write A Treatise of Human Nature, I don’t think I would have lumped all feelings and passions and instincts into an unexamined soup bowl, to be stirred with my spoon of reason. I would say that humans were, at base, pack animals, predators in small societies governed by relations of affection, dominance and submission, until the gift of language and story-telling enabled our species to become a peculiar kind of herd animal, a talking, story-telling herd animal. Predators are smart and cunning, strategic, but not, I think, big story-tellers or philosophers (though I have a cat, who does a surprisingly good imitation). To become herd animals, grazing agriculturalists, prudent and patient and conformist, and more powerful acting in concert in large groups, we needed language to fashion common identities, beyond the scale of groups where we could know and care about our fellows, personally; we needed to be able to idealize and abstract, to become religious and patriotic, to become individually more stupid and less violent, as herd animals tend to be, but collectively more dangerous and violent. And, somehow, in the interstices among the great variety of human potential, between the poles of simian wolf and simian sheep, we managed the happy accident of analysis and science (despite the disinterest of wolf and sheep).

That’s the deep background to our continuing struggle as a species to evolve the means to survive ourselves, by talking, or b.s.’ing, our way out of the traps we’ve fashioned with our b.s.

Steve Jobs thought a mouse should only have one button. He also couldn’t understand why there should be both a delete key and a backspace key. Or why application windows should have their own menus.

Two-button mice work quite well on Macs — that is, they invoke the same kind of context menus as appear in Windows. But, now, you can use so many different “gestures” that the computer can appear to be practically spastic. Progress.

@Bruce Wilder
Sorry, I meant: epidemy of lack of ethics.
Meaning, how is this that today people steal and cheat more than yesterday?
Re: euro, in facts if you look at italian public debt, it was rising steadly before the euro adoption. One of the selling points of the euro was that it was supposed to lower interest on italian public debt. I think that the euro is a problem because it prevents europeriphery governments to adopt some policies, like high inflation, that would be useful to us; but I don’t think it is the cause of the problem.

Good behavior doesn’t, generally speaking, pay well. Stealing reduces the price I pay, assuming I can get away with the theft. Selling a fake is a way to cut the costs of production.

It is enlightened self-interest to see that actual value to society or in the social aggregate from social cooperation depends on the integrity of the system of social cooperation, that is, that people cooperate within the constraints of rules, but a successful system of rules simply raises the payoff from breaking the rules.

I assume most bank robbers are political conservatives; they want money to buy stuff, and, if a bank robber were to think about it, I’m sure they would realize that money would be worthless, if everyone could and did steal it. They want to steal, but they want everyone else to accept money in exchange for goods.

I think the root problem with the Euro is that the folks designing, instituting and administering the system did not know what they were doing. But, there were plenty of smart people, who could see how to exploit the shortcomings in the system and its web of constraints. Economists, who preached a brain-dead “free-market” ideology of sweeping away institutional constraints, were particularly at fault for setting up the system to fail. In this, they got plenty of help from people, who would be in a position to benefit from the system breaking down. The breakdown of the system will pay off, just not for the society as a whole.

When you posit a “g” of return on constrained economic behavior, and compare an “r” from lying, cheating and stealing, “r” is going to be bigger.

Beyond that — and this was what I was trying to highlight — the returns to the social aggregate, the public good — “g” may not be easy or costless to privatize. Just because an investment has a positive net present value does not mean that political structures can be costlessly erected to capture the future payoff, and channel that payoff to fund a debt.

As a general proposition, because capital investment is sunk cost investment, and much of the return is an economic rent, there’s no reason to think benefits can be privately and efficiently captured and used to fund a debt, as a general rule. To naively imagine that good investments pay off privately is to fool yourself before you have even begun to think about the problem.

I haven’t read any of the comments on this thread yet, so this may be a moot point, but do you agree with the following assessment of Piketty’s position (as expreseed by Ives Smith and presumably Pilkington)? Is that what Galbraith really said?

“As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance. As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.”

233: No, because I do not think that Piketty puts much weight at all on technology and education as factors affecting income inequality.

He says nothing much surprising about CEOs appointed by friendly boards, and says that is the major non-rentier inequality. He remarks on entrepeneurs like Gates turning into rentiers in their lifetimes.

Now he mostly talks about wealth inequality, and inequality of wealth turning into inequality of income. Again this is mostly the .o1% and the 1%.

He does look at one point at the “patrimonial middle class” mostly in France but also in the US, those say in the 75k euro/dollar to 200k euro/dollar range, and shows how very many of them achieved a level of wealth and income through gifts and inheritances from parents, mostly education and real estate.

Having said the above here is a link to an interview with Costas Lapavitsas, someone I like along with Varoufakis. Part one of four on financialization. CL says it is all different now.

On the primary level, Gates and Waltons and Kochs have high incomes because they have buckets of money.

On another level, why do they have the money? Importantly, mostly stocks now, instead of land and bonds. This is where “technology and education” might come into play, as drivers of globalization and managerial capitalism and financialized capital reproducing and accumulating world-wide on lightspeed networks. Veblen is very much worth reading on the last Gilded Age. No, the stuff other than Leisure Class.

Collin Street:r>g means that on average people are borrowing money for investments that won’t pay, yes?

As I understand it (n.b. not having read the book itself and w/ the ritual disclaimer IANAE), r>g means returns on investment exceed the rate of economic growth (as measured by GDP growth, presumably). This says nothing, afaict, about whether people are borrowing money to invest. Standing alone as a formula, r>g seems to me to be completely silent on the question of where the money to invest comes from (earned, inherited, borrowed, stolen, reinvested — standing alone, it doesn’t say). Second, it does not necessarily mean that on average “investments won’t pay”; r>g must imply that at least some investments do “pay,” otherwise r couldn’t be greater than g. I’m not sure how the “on average” thing works out, though, and the returns to the very richest presumably do skew the whole picture. Presumably most of the returns are flowing to the top 1% or .1% since they have so much more to invest to begin with (and, as Piketty evidently says, they get the best advice). But I don’t think C. Street’s implied summary can be quite right.

Btw, I believe no one has mentioned the latest Michael Lewis book that has been getting some media attention. Would seem possibly to have some relevance to aspects of this discussion.

C. Street said r>g means people are borrowing money to invest, and to my perhaps naive eye that appears to be a claim about “where money to invest comes from,” i.e., people borrow it. And r>g does not, to me at least, say that.

And what does “funding the difference” mean here exactly? This not like funding a trade deficit; we’re not in the land of accounting identities and all that stuff, are we? E.g. companies can, within broad limits, pay whatever they decide to in dividends, irrespective of the overall growth rate of the economy or even to some extent of their own balance sheets, no?

In fact, isn’t one insistent, widespread criticism of many U.S. corporations that they have subordinated all other considerations to maximizing returns for their shareholders? Aren’t we talking partly about conscious corporate decision-making here? You (BW) wrote @219 that “To get r > g requires … lies and fraud in a system for generating and conveying information,” but it seems to me that isn’t necessarily so. It requires, rather, corporations making decisions to place their shareholders’ (short-term) interests above everything else.

RL 243
Thanks for link.
Nitpick: Looking quickly at it, I see: “By invoking capital right from the beginning, Piketty breaks ranks with most modern discussions of inequality, and hearkens [sic] back to an older tradition.” Should be “harkens,” I believe. Interesting that the editorial staff at NYRB missed this. Well, ****, they’ve got a thick journal to put out; they can’t be bothered w spelling.

On further reflection, that’s not quite right. r is the rate of return on capital stock, g is the rate of increase of the output, which is a flow. We need further assumptions about how g is related to the capital stock. If somebody can clarify in a few lines, please do.

@TM 246
If you assume that “capitalists” reinvest all their returns in new capital goods, and r is higher than g, then the capital stock is growing faster than total income.
This implies either a fall in r (a “falling rate of profit”, aka secular stagnation) or that capital is eating out the share of the workers.
This implies that a certain point (which depends on how large a share of total income initial profits were) real wages have to fall even if total income is rising.

Maybe but we have a stock on the one hand and a flow on the other. The economic output G (a flow) depends on the capital stock R, so G=R*e (e would be something like the capital productivity). Now part of G is consumption, part of it is capital replacement, and part is capital growth. g, the growth rate of G, doesn’t tell us anything about that partition and neither does r, the growth rate of R. It is intuitive that when r goes up, the part of G left over for consumption declines, but r>g is not in itself sufficient to derive what really happens. You need further assumptions about e.

I’m not well schooled in economic terminology but I think I can parse the algebra.

@TM
Unfortunately I’m not well schooled in economic terminology either, and last time I had to study vaguely complex math was at high school, but I’ll give it a try.

Definitions:

t -> represents time as a serie of abstract steps, starting with t0

G -> represents total income. at t0 I’ll set G as 100.
g – >represents growth, that is the increase of income over time. I’ll assume that g is costantly 10%.
W -> represents the wage share of income. I’ll set W at t0 as 90.
C -> represents total capital.
R -> represents the profit share of income, so R+W = G. Therefore, at t0, R = 10.
r -> is the rate of profit, that is R/C. I’ll set r higher than g, so constant ay 20%. From this we can deduce that C at t0 is 50.

NOTE = since r is supposed net of capital replacement, we can assume that capital replacement is 0.

At this point my math skills fail me (eek! exponential equations! math is hard), but it seems obvious that R grows faster than G, assuming that g and r are constant. This means that, while W at t1 and t2 is growing and growing faster, eventually it will have to fall, or either r will have to fall.

Side note: it is said that you can’t compare a stock with a flow. But in fact you can if you have the temporal unit. For example, suppose that I have a bank account (stock) of 100$, and a wage of 10$/month (flow). If I save all my wage, one month later I’ll have a bank account of 110$. Not that difficult, you see.

Thanks. My immediate response would be that there is no mention of depreciation, and the assumption that all capital profits are reinvested is patently false. I’m also not convinced that anything lying in a bank account (or stock or real estate portfolio) represents capital stock. Wall Street bubbles aren’t productive capital (=capital stock). But I gather that economists don’t know how to distinguish productive capital from bubbles so they just assume it’s all productive.

I also take issue with the designation of G as total income. G is total economic output. It’s not the same as income. Presumably economists assume that everything produced is enjoyed by somebody as income. But that can’t be right. When a capital owner spends money on capital replacement, that money is income for the workers who do the work but it is also subtracted from the capitalist’s profit = income. (And if we accounted for Natural Capital depreciation, as we should but never do, the whole model would be ridiculously inadequate.)

As to correctly accounting for stocks and flows: I have to disagree with your careless remark. A flow doesn’t turn magically into stock. Economic models really need to make a sharp conceptual distinction between the two, which they don’t. The Polish economist Michał Kalecki once defined economics as “the science of confusing stocks with flows.” (I remember reading something similar from Herman Daly).

@251 is the cost of capital replacement income for the supplier of the fresh equipment?

China’s absolute growth is bigger than US absolute growth. individual countries are still the preeminent economic units and one book can’t cover anything but shouldn’t one of the reactive internet’s tasks be the setting of this into a global context?

@TM
I mostly agree on what you said (excluded the difference between stocks and flows- the two things are different but must be comparable IMHO).
However this r>g thing isn’t a logical certainity, but an empirical question.
Is really r>g in capitalist economies?
There isn’t a real hard reason for this, but Piketty, empirically, found that this is true most of the time (or so I gather from the various reviews). The point isn’t theoric, is empiric.

This is the second paragraph of B. Milanovic’s piece in The American Prospect summarizing Piketty’s basic argument:

Piketty’s key message is both simple and, once understood, almost self-evident. Under capitalism, if the rate of return on private wealth (defined to include physical and financial capital, land, and housing) exceeds the rate of growth of the economy, the share of capital income in the net product will increase. If most of that increase in capital income is reinvested, the capital-to-income [i.e. capital-income to wage-income (?)] ratio will rise. This will further increase the share of capital income in the net output. The percentage of people who do not need to work in order to earn their living (the rentiers) will go up. The distribution of personal income will become even more unequal.

Reading this passage drove me back to the chapter on “national income and product” in my (very old) basic economics textbook, which for some reason I still have. (I took the basic course but nothing beyond that, and it was a v. long time ago.)

To simplify considerably and cut to the chase, the textbk says that “net national product” (which I assume is what’s meant in the above quote by “net output” or “net product”) can be measured by: (1) consumption + investment + govt spending or (2) wages + rent + interest + profit. The two ways of calculating net product result in the same number. In Piketty’s argument, evidently, it’s the second approach to measuring ‘net product’ that is being used, and the argument, if I understand it rightly, is that the wage share of the net product will fall if the rate of return on capital (broadly defined) exceeds the growth rate of the economy. But this is still a bit confusing to me, since it would seem economists include earnings on or from capital (rent, interest, dividends, etc.) when calculating the growth rate of the economy, i.e. the growth rate of net product.

So, I get Piketty’s conclusion — the wage share of net product will fall; the rent/interest/profit share of net product will rise — but, without having read the book, I don’t quite get the argument about exactly why this happens (just saying r>g doesn’t answer this for me partly because, as just mentioned, r would appear to be included in the calculation of g as that is conventionally done). In other words, intuitively the argument sort of makes sense, but it makes less sense to me when I try to unpack what the “growth rate of the economy,” as it’s usually calculated, means.

I’m sure the economists here will be shaking their heads at this display of dumbness on my part, but so be it. (I’ve haven’t helped clarify matters much earlier, so I might as well continue as I’ve begun.)

p.p.s. In fairness, I suppose I did eventually have to imbibe a little bit of post-Econ-101 economics, but I never went back and thought about certain basic concepts as mainstream economists use them, and I never grasped them at a v. deep level to begin with. (I did pass the basic econ course, but suffice to say it was not exactly a highlight of my college transcript.)

I offer what follows as a general response to some of the themes raised in this discussion, and not in response to any single comment.

Capital begins with savings. Savings are goods and services, or claims on goods and services, in the form of money, or some other store of value, that do not need to be immediately consumed. (We need attach no moral significance–“thrift,” “abstinence”–to any of this, but merely recognize the fact.) Savings derive from the sweat of the brow, or the ill-gotten gains of “primitive accumulation,” or from inheritance, rent, interest, dividends, profits…whatever.

Savings have a value, in the simple sense that other people will pay us for the use of our savings, over a given period of time, without the savings being consumed in the process. We get our money back, with interest.

What is this “use” that people are willing to pay for? (“willing” in the sense that, in the context of a society where property rights are enforceable, and therefore there is no choice but to compensate the property owner for any benefit received, people will pay without otherwise being coerced; i.e., there is something “in it” for them). The common denominator here is time. Regardless of her purposes, the user of savings is buying time in the sense that she is acquiring a claim on goods and services today that would otherwise take her a very long time–perhaps more than a lifetime–of personal savings to acquire.

Broadly speaking, savings are used to “bring forward,” or collapse time, either for the purpose of consumption, or for the purpose of purchasing means of production to initiate a productive process.

As an owner of savings, I don’t really care whether my savings are used in processes of production or to finance other people’s consumption. I will simply be concerned with investing my savings in something that suits my tolerance for risk and my time horizon. So I can buy land, bonds, stocks, or make car loans or business loans, or keep my money in the bank and let the bank make car loans or business loans on my behalf. I can also decide to keep my savings in the form of cash in the proverbial mattress. In all but the last case, I am making my savings available to others–allowing them to consume or to initiate productive processes–now, today–that would otherwise have been beyond their means.

Finally, and now we come to Marx’s primary focus, I can use my savings myself, directly, to initiate, or re-initiate, a productive process–purchasing labour, raw materials and means of production and using them to produce a commodity for sale. My profit will reflect a return on the use of my savings. The difference between me and the workers that I hire in this case is that I have the funds, now, that I can advance to set the productive process in motion, and they don’t. Time is on my side, we might say. Yes, they could “save up” and then employ themselves. But they would probably be dead long before they ever had sufficient funds to purchase the raw materials, machines and buildings necessary to the process. In fact, “someone-who-would-be-dead-before-they-had-saved-enough-to-buy-the-means-of-production” is just a long-winded way of saying “worker.”

Marx saw capital as a flow: money buys input commodities (including what Marx defined as “labour power”), which are transformed, through the productive process, into an output commodity, which is in turn sold for money. And the amount of money at the end of the process exceeds the starting amount–or that’s what the capitalist intends at least. I think it is fair to say that we have “capital” at each step in this process. And, to the extent that cash, land, stocks, bonds, buildings and so on all represent a store of value that can, with greater or lesser ease, be converted into money in order to initiate a productive process, they all can be considered capital as well. I am not bothered, based on what I have heard, with Piketty’s broad definition of capital.

Marx saw labour power–the potential or capacity to perform work–as a commodity like any other that had to be produced and that should trade at its cost of production in a competitive market. However, unlike other commodities, the cost of production of labour power was not, or not entirely, a function of particular technical requirements at a given time. Rather it was a function of culture, history and social development. Marx called the labour power commodity “variable capital” (designated “V” in his math) to distinguish it from all of the other input commodities, which he called “constant capital,” or “C.” This distinction, and the “variable” designation, reflected Marx’s belief that only labour had the capacity to add incremental value in a productive process-i.e., to generate a surplus. All of the other “constant” capital is simply adding its original input value to the value of the finished product. (Based on the forgoing, I see nothing un-marxist in speaking of “human capital.” We only need to imagine different kinds of labour power with different costs of production trading at different prices. For Marx at least, labour power is a form capital–specifically, “variable capital.”)

Marx’s labour theory of value (LTV) is controversial, and, to my satisfaction at least, discredited. But abandoning the LTV does not make profit, or the surplus, disappear; nor does it commit us to accepting any particular distribution of assets or income as “just” or “in the nature of things.” It does, however, require us to look elsewhere for the source of the surplus.

Capital earns a return because, in addition to having a value that others are willing to pay for, as described above, it is scarce. Take away its scarcity, and, like water, regardless of how valuable it is to others, it will not earn a return. We can see this at work in the market for short-term US government treasuries–generally considered “risk free” investments, and therefore a measure of the value of pure abstinence, or deferred consumption, alone. This rate is close to zero right now, because there is no scarcity of capital seeking a risk free return. (In fact there were periods during the last financial crisis when this rate was actually negative: capital owners paid the US government a premium for the peace of mind that came with the assurance that their money would be returned to them on maturity.) What is scarce right now is capital to invest in ventures that entail varying degrees of risk. And it is this scarcity (the supply factor), interacting with the contraction/collapsing of time that capital achieves (the demand factor), that is the source of the return to capital. Note again that one can agree with the foregoing without committing oneself to the morality of the situation. You can argue that the capitalist is fairly rewarded for abstinence and/or risk taking; or you can argue that capitalists earn a return simply because, in the context of a society that enforces property rights, they can.

Consider a firm’s balance sheet: one the left, assets — the stuff, which will be expended in the course of the firm’s business — and on the right, equities and liabilities — what and who finances the assets. The equities and liabilities are the legal claims to ownership of the future cashflows of the firm. These claims are “capital” and income from them is capital income.

If we think of capital as being the assets of the firm — the stuff that will be expended to generate revenue — we might well take a benign view of the role of capital in the economy. Capital investment is investment in assets, which anticipates an increase in the value of the assets by the operation of the firm. The firm purchases inventory, anticipating an occasion to sell from the inventory at a profit. The firm purchases production equipment, anticipating an opportunity to expand output by using the equipment to increase the productivity. Capital earns a return, by increasing future output. A $100 could buy labor services to produce a 100 widgets today, or equipment to produce a 110 widgets tomorrow. The return on capital — the ability to pay interest to the provider of equity finance — rests on the potential of capital investment, incorporating technological knowledge, to increase output in the future.

The r in r > g seems to represent that potential in capital to increase output. But, the “> g” calls this optimic view into question. r > g says the rate of growth in capital is greater than the rate of growth in output. Capital isn’t, in this scenario, a rising tide raising labor’s boat; capital is swamping labor’s boat.

r > g, to the extent of r – g, isn’t capital financing a factory, which increases output and productivity, such that workers get a raise, and consumers see falling prices. It’s capital financing a payday lender.

The ugliness of r > g is logically necessary, at least for r > g as a sustained long-term trend. It is saying that the equities and liabilities side of the balance sheet — the side of the balance demanding payment, demanding income from capital — is growing, even while the productivity of the asset side in producing increases in output lags.

“Savings are goods and services, or claims on goods and services, in the form of money, or some other store of value, that do not need to be immediately consumed. “

Because we have money and a financial system, people can accumulate money and financial claims. Calling that “savings” is a common usage.

But, “savings” are not the “goods and services” themselves. “Savings” are money and financial claims — pieces of paper, if you like, or bits in a bank computer — which can be traded for goods and services as long as the monetary and financial systems remain more or less intact and functional, which is to say, as long as people are willing to accept the money in question in exchange for goods and services. And, as long as the monetary and financial system is managed adequately.

Are money savings scarce? In some states of the world, I suppose, but as a general matter, no. Most of the time, desired saving is excessive, at least relative to opportunities to make private investments in productive processes that could be expected to yield increased future production. The world is awash in cash, choking on a savings glut.

Of course, there are always plenty of people willing to “use” one’s savings, in exchange for a promise. A lot of these people are hucksters and confidence men. And, the chief problem of the system of financial intermediaries is to avoid “investing” in schemes, which are bound to yield a loss. Or, if you’re cynical, the problem is to participate profitably in facilitating a loss for the suckers.

If “Capital”, the accumulated savings as money and financial claims, is growing faster than output, there’s bound to be a lot of cynical “investment” schemes to relieve labor and government of its claims on income. If savings is growing more rapidly than output as a secular trend, that’s the only way it could be.

That’s a confused mash-up of Marxian and Austrian marginalist conceptions. In the first place, savings don’t produce investments and aren’t deferred consumption. Investments produce savings, (in the “real” sense, of unit-cost reductions, productivity increases or efficiency, increases in actual and potential distributable productive surpluses). That’s why there is a system of banking and credit: to finance the building of future production capacity, without deflating current production and consumption. And why that banking system is leveraged: it creates credit-money, beyond the “hard” money that would be currently in circulation, (from ongoing production), which is always a bit fictitious and speculative, and such “financial assets” will vary in their “moneyness” not just with the returns from actual productive investments, but in relation the the varying degrees of “moneyness” in the outstanding stock of “financial assets” and the cyclical claims on the realizations of productive investments that they seek to lay claim to.

Nor is production merely a means to hedonic consumption: not only is production at all levels constantly ongoing, (such that interest rates are not simply expressions of time-preference, but reflect the various states of the ongoing system), but production shapes the (social) world in which we all must struggle to survive and the (projectively constructed) human and natural ends we subserve. It’s not just that” you can’t eat what you don’t grow”, it’s that you don’t grow what you can’t “eat”. (Man ist was er isst).

Nor is the “value” of capital determined by its “scarcity”. (One could argue that its “scarcity” is produced by power-relations, though it doesn’t follow that changing those power-relations would eo ipso solve all the systemic functional problems that we face). And certainly nowadays there is no global scarcity of capital: the Fed has been handing out money like candy to the elite financial system, and globally corporations have some $3 trillion in cash sitting on their balance sheets. What is “scarce” is perceived opportunities for real productive investment, due to multiple intersecting dysfunctions, not least of which is an over-supply of “investable funds” facing a vast accumulation of unrealizable debt-claims, too much capital facing too little productive employment. This looks to me like an over-accumulation crisis in fictitious capital, not “scarcity”. And you might ask yourself, why is it that there always seems to be a “scarcity” of capital, (even when there isn’t), while labor is never scarce, but always in excess supply. There’s some basic “mystification” lurking there.

At any rate, it seems to me on a “deeper” level that there is no shortage of work to be done. If we are to accomplish the great transformation of advanced production economies in the face of growing resource constraints and environmental limits into a sustainable system of efficient energy and resource use, then the “value” of vast amounts of capital, both as physical stocks and infrastructure and as the pile of financial assets claims laid on top of them, will have to be “destroyed”, even as vast amounts of real investment and its financing will have to be undertaken to replace and renovate the “destroyed” system. It might be that dilemma that has given the global capitalist system pause, in the face of the unsustainable imbalances and restructuring needs that it itself has created.

Well, just to make some brief comments on Marx and his deployment of LTV. It was supposedly the “transformation problem” that proved Marx mistaken and inconsistent and thus his entire 3 volume elaboration nugatory. But that’s because he was mis-read as requiring labor-values be transformed into monetary cost-prices of production, which are the actual phenomenal basis of investment decisions, (once the “assumption” of all sectors having equal organic compositions of capital was dropped). But actually both value and cost-prices terms have to be so “transformed” at the same time and in the same way. So regardless of what exact interpretation or solution you attribute to Marx, he was actually saying something more interesting than a technical puzzle: cost-prices of production can’t be determined without first determining the distributions of surplus-value, (between profits, rents, interest, taxes, etc.), that go into their determination. IOW he is suggesting a rather complex account of price-determination that involves re-distributing value between different sectors, (such as, e.g., with the productive quasi-rents of oligopolistic industries, which is very much part of his account of the tendency toward ever-increasing concentration of capital), in order to arrive at a tendency toward a putatively uniform equilibrium rate-of-profit. The reason that Marx was apparently so relaxed about his “solution” is because, given constantly changing technical conditions, the cost-prices of production, on which momentary investment decisions depend, will constantly be changing around, (unlike Ricardan “natural prices” to be solved in long-period equilibrium), whereas Marx is concentrating on the overall systemic outcomes or tendencies of such myriad momentary decisions. Which brings out that Marx’ deployment of LTV is not just making a fundamentalist claim that labor-power produces all “value”, but rather is about the interactions of labor-power with technical change within a complex account of the dynamics of capital accumulation (and concentration). And the class struggle between labor and capital is not just about the distribution of income, but also and very centrally about control over the production process and the public and social ends it should subserve, including its overall (re-)investment function. And contrary to RL above, I don’t think that Marx was offering an “equilibrium” account, but rather was using those classical premises to undermine them, offering an account of long-run dynamic disequilibrium and the accumulating crisis tendencies that would accompany it. That is at least a more interesting account of price formation and dynamics than simply explaining nominal prices by means of nominal price, tautologically, because short-run supply and demand equilibrium “at the margin”.

Mattski above. Words have various uses, and just because in everyday use, one can “rent” an apt. or car, or furniture, or TV, doesn’t mean that you have grasped the economic concept of “rent”. RL made a mistake when he attempted to explain it through Marx, (who has a rather murky two part discussion of the issue). It’s much easier to go back to Ricardo’s account of land rents, where the economic concept of rents was first clarified and explained. (B.W. is often referring to a much more complex account of rents, basically what Marshall called productive quasi-rents, that accrue to large-scale oligopolistic production). But, please, take the time to look some things up, before adventitiously opining.

As to Piketty, whatever he adds in terms of accumulated and analyzed data, it doesn’t seem that theoretically he’s gone much beyond Sraffa. Sraffa has a theorem that given to identical economies with physically identical capital stocks and outputs, the one with the high rate-of-profit and thus inversely the lower distribution to wages, will have a “negative Wicksell price effect”, which means that the value of capital, of the capital-to-output ratio and of output will all be “higher” when expressed in nominal prices, despite being physically identical. (Needless to say, this is not any actual comparison between two economies, but between the same model with a different parameter specification, and doesn’t “prove” anything about the real world, but rather is an abstract heuristic exercise). But this abstract point actually makes sense in “market” terms. Since prices and wages are approximate inverses, (high wages = low prices and vice versa), low wages and high prices will result in increase in nominal prices for both capital and output. And comparisons between physically similar sets of capital equipment with differing rates of profit are occurring on stock and financial markets all the time, and obviously “the market” will pay a much higher price for the more profitable set. But it seems to me that the heuristic-critical point here is that capitalists in general will always be trying to engineer such a nominal price illusion in their favor, regardless of the economic conditions or circumstances they might find themselves in.